Aldo Caliari, Guest Blogger
Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.
In the last few years the global economy has faced dangerous increases in exchange rate volatility. Global imbalances, after receding temporarily, are again on the rise.
These problems are certainly not new, but the currency tensions have rarely been so high since the fall of the Bretton Woods system in 1971. Countries are engaging in competitive devaluations to capture a higher share of diminishing export markets. The need for a monetary stimulus by the US –however necessary that stimulus is— threatens to further undermine the effectiveness of developing countries’ tools to keep their currencies in check.
So far, the problems have been met by the Group of 20 with mild variations of what can be done in the existing monetary framework. The Multilateral Assessment Program looks very much like the familiar Multilateral Consultations on Surveillance that the IMF launched in 2006. Mr. Geithner’s proposal, yet one more variation of the same theme but focusing on current account, rather than exchange rate targets, is unlikely to be more successful.
It is time the G20 goes for a multilateral and collectively beneficial response, but this requires thinking outside the box of the existing US dollar-centered international monetary system and its attempted band-aids.
An orderly transition to a renewed international monetary system is not only possible, but absolutely necessary. Further, if appropriately designed, such reforms could simultaneously achieve exchange rate stability—enhancing the benefits for trade and development, increase much needed development and climate finance, and support full employment.
In such reforms, Special Drawing Rights will have to, in a revamped form, play a central role. The revamping should involve policies for their allocation, interest charges, composition of the basket, liquidity, transferability and use.
Arguably nobody –not even the US –benefits today from the existing system, except perhaps in the most myopic of interpretations. It is time to change it.
Aldo Caliari is Director of the Rethinking Bretton Woods Project at the Center of Concern.