Reconsidering SDRs

Article excerpt

The current global financial crisis has unsurprisingly intensified calls to reform the governance of the International Monetary Fund. Richard Cooper's article, "Necessary Reform: The IMF and International Financial Architecture" (Winter 2008), parallels Chinese Governor Zhou Xiaochuan's speech on March 23, 2009. In the speech, Zhou suggested broadening IMF governance to better reflect the rising economic importance of emerging markets with an uneasy hold on large reserves of dollar assets; in light of this, he advocated the revival of the IMF's Special Drawing Rights (SDR) facility. It would act as a "super-sovereign reserve currency" to replace purely national currencies, such as the US dollar, in official exchange reserves. Fortuitously, Cooper analyzed several of the important issues that Zhou raises.

First is the issue of "legitimate" governance. Cooper has been a leading advocate to greatly expand IMF voting and borrowing rights to emerging in order to better reflect their economic reform. This would require a sharp fall in the voting rights of medium-sized European countries (below the current 31 percent), while possibly ending the convention of a European IMF Managing Director. However, Cooper admits that such reform before the global financial crisis would not have made any difference. During this era of the "great moderation," there were therefore no significant demands for drawings from the IMF.

In my view, the huge US cumulative current-account deficits essentially prevented most emerging markets from international borrowing, so that they could not (as in the past) build up unsustainable foreign currency (dollar) debts that led to devaluations. Because the dollar was effectively international money, the United States alone had an ultra-soft international borrowing constraint, free to increase debt without devaluation risk. It is this asymmetry of international currency arrangements that Zhou wants to change by rehabilitating SDR.

But is this possible? Cooper points out that the SDR is not itself an independent monetary entity, but rather a unit of account based on the purchasing powers of the underlying dollar, euro, pound sterling, and yen. …


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