Little currency for global money?

18 November 2011

While the G20 postponed decisions on issuing new special drawing rights (SDRs), the IMF-managed international reserve asset, the IMF completed its surveillance review and a new Fund report tackled the thorny issue of global imbalances.

Expectations that the November G20 summit in Cannes, France, might agree further issuance of SDRs (see Update 65) were quashed, with SDR issuances mentioned as only one method for raising “additional resources” to be discussed by G20 finance ministers at their next meeting in February 2012. The G20 communiqué also postponed a review of the criteria for selecting the currency basket that determines the SDR’s value – currently sterling, the euro, yen, and dollar – to 2015, “or earlier as currencies meet the existing criteria to enter the basket” and asked the IMF to “further clarify” these criteria. Writing in a September compilation of papers on New directions for international and monetary policy published by German political foundation Friedrich Ebert Stiftung (FES), Pablo Pereira, former IMF executive board member, renewed calls for “large and regular allocations of SDRs” to ensure “the money will go to responsible-democratic governments”, but also to “facilitate an orderly depreciation of the four currencies of the SDR basket”.

Meanwhile, an October IMF staff discussion note, Internationalisation of emerging market currencies, reiterated past IMF arguments that the solution to the decline of the dollar should be the gradual use of other currencies starting with the Chinese renmibi. Aldo Caliari, of US–based NGO Center of Concern, called this a “narrow agenda that seeks to broaden the currency basket not guided by any particular rationale to make the basket more stable and flexible, but by geopolitical realities”.

narrow agenda not guided by any particular rationale

Interestingly, the link between this agenda and the IMF’s longer-term push for international financial liberalisation were made plain in the note, which argues that “this process, however, will require deeper financial markets and further progress to reform and liberalise the capital account”. A similar case for incremental change was put in a September paper written for the G20, Reforming the international monetary system, by academics Emmanuel Farhi, Pierre-Olivier Gourinchas and Hélène Rey.

Imbalances remain

To tackle the global economic imbalances that many argue were an essential precursor to the current crisis (see Update 77, 75), the G20 made only the usual affirmations of the need to “move toward more market-determined exchange rate systems”. However, in a September article, Jan Kregel of the Levy Economics Institute argues that this would entail a major change of policy in China and other fast-growing developing countries. He concludes that “if we are going to ask developing countries to contribute to international stability by growing less rapidly or shifting strategy from stabilising exchange rates, or to change from a strategy that is export-led to one which is more domestically demand-led, this will come at a cost to the developing countries in terms of foregone income growth, which should be offset by the developed countries.”

The IMF’s first Consolidated spillover report examining the effects in other countries of the policies of five globally important economies – the US, China, the UK, the eurozone and Japan – pulls fewer punches. It comes down on the side of China in the ongoing argument over whether surplus or debtor countries bear more blame for any negative impacts of global imbalances.  While China’s gradual approach to increasing the value of its currency “yields only modest growth spillovers”, a tightening of US monetary policy (by for example raising interest rates) “will reverse the rise in emerging market capital inflows and currencies” — confirming the analysis of a recent report by intergovernmental organisation the South Centre, that the boom in capital flows to developing countries is built on the fragile foundations of low interest rates in northern countries (see Update 75).

IMF surveillance review

In October, the IMF completed its Triennial Surveillance Review, the first such review to assess IMF surveillance at the multilateral level in addition to its normal country level assessment. Recognising the many “well documented weaknesses” of past performance, the report identifies five areas for future priority: interconnections; risk assessments; financial stability; external stability; and “generating greater traction.” The central issue of traction, or rather the IMF’s lack of traction or influence over major economies, has been recognised by many as being at the heart of the IMF’s failures in the run up to the crisis (see Update 74). The review notes that “interviewees suggested that the Fund was insufficiently critical of the policies of its major shareholders” and that the IMF’s influence “is higher for programme than non-programme countries” and “is lower for G20 than for non-G20 countries – a source of concern given the more systemic nature of the former.” However, it recommends only to “bring external views into surveillance to increase its candor.”

The review recognises the criticism, repeated by Nobel laureate Joseph Stiglitz in his submission to the review, that the Fund pays little attention to the social and political circumstances of the countries they survey, and recommends ensuring “coverage of social issues that are important for members’ stability in Article IV consultations” relying on the advice of the World Bank, International Labor Organisation (ILO) and others on how to do this.

The review also recognises “limited coverage of LIC [low-income country]- specific risks among multilateral surveillance products” calling for such coverage to be “stepped up”, though there is little attention paid to analysing why this should be the case, or how it could be rectified.

IMF assessments of exchange rates caused most debate among board members. The review promised to “improve consistency and transparency of exchange rate analysis and ensure discussions of external stability in staff reports extend beyond exchange rates.” The review also recommended adopting a strategic plan for improving financial sector surveillance, and examining ways of overcoming legal obstacles to expanding the focus beyond exchange rates, including possibly changing the Articles of Agreements. The IMF’s executive board endorsed the review’s recommendations.

Meanwhile, the UK prime minister’s report to the G20, Governance for growth, recommended that the IMF “enhance its surveillance role by updating and codifying its multilateral surveillance function.” However, as in other areas, the report set extremely low ambitions, suggesting only tweaks to existing institutions, which may be one reason it was largely ignored by the G20.