Joseph Stiglitz has written an article in the Financial Times dated April 1, 2011, arguing that a substantially enhanced issue of Special Drawing Rights (SDRs)by the IMF should be the first step in the reform of the international monetary system. The article is of special significance because it is based on a statement issued by 18 leading economists from across the globe calling themselves the Beijing Group, which includes nine known Chinese figures.
Few would object to the idea that the IMF must further enhance the allocation of SDRs and alter its distribution to help countries deal with situations of balance of payments stringency. But it is difficult to believe that the issue of SDR’s would offer a solution to the problem that the United States and the dollar do not have the requisite economic strength to warrant the dollar’s status as the world’s reserve currency. The problem is that the US is not the world’s most competitive economy, that the dollar has for long not been backed by gold, and that there are just too many dollars circulating globally and too much wealth invested in dollar denominated assets to ensure confidence in the currency. Yet, there is no other currency that appears likely to emerge as an alternative in the foreseeable future.
The Beijing Group advances three arguments in support of the SDR as an alternative reserve. The first is its view that it is because a national currency such as the dollar serves as reserve that the burden of adjustment to balance of payments imbalances falls on deficit countries, resulting in a global recessionary bias. Second, that the use of a national currency like the dollar as reserve forces the US to run unsustainable current account deficits to ensure that there is adequate global liquidity, and raises the danger that any effort of the US to shrink those deficits can generate global difficulties. And, third, that the dollar as reserve forces developing countries to accumulate large surpluses to “self-insure” against future balance of payments crisis.
There are two difficulties associated with this line of reasoning. One is that the reading of the global economy and its functioning implicit in each of these arguments is questionable. The second is that even if the reasoning is correct it does not explain why the SDR is an alternative.
Implicit in the Beijing Group’s statement is the assumption that global problems arise solely or substantially because global outcomes result from the interaction of independent nation states. This underestimates the role of large corporations and finance capital. Once we take account of the motivations that drive corporations, especially the obvious one of maximising profits, an important determinant of the distribution of current account surpluses and deficits in a world of globally mobile capital and technology is the search of transnational firms for low cost production locations. Such locations normally tend to be a few countries with a large reserve of cheap labour. As a result the most productive, best-practice technologies get combined with cheap labour, raising the level of global surpluses and inducing an underconsumptionist, deflationary bias into the system. It is difficult to see how just the availability of more of any reserve would counteract this tendency.
The reserve accumulation in some countries resulting from this process is compounded by flows of purely financial capital, encouraged by the accumulation of relatively cheap liquidity in the global financial system. That in turn has resulted, inter alia, from the US government’s exploitation of its position as the home of the world’s reserve currency to function as if it faces no national budget constraint, and its ability to undertake huge expenditures abroad aimed at maintaining its hegemony. The deficits associated with such expenditure have in turned been financed by the reverse flows of dollar surpluses invested in dollar-denominated assets. Hence, it is unlikely that the US, which wields a veto, would agree to a substantially enhanced issue of SDRs in order to create an alternative reserve that would weaken its own financial position.
Finally, the idea of a wholly new currency serving as a unit of account, a medium of exchange and a store of value at the international level does appear a bit far-fetched. The denomination of trade in that currency, the issue of financial assets denominated in that currency and the quantum and distribution across countries of the currency issued have to be all decided jointly and with consensus. That does appear near impossible as of now.
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