ActionAid’s view of the global financial and economic crisis focuses on two questions: how can greater resources be made available to developing countries that do not have the same capacity for stimulus spending that richer countries do? and what systemic changes are required to reduce the likelihood of similar massive disruptions in the future and to create a more equitable global financial system for developing countries?
Our answers to both questions are tied up with an obscure quasi-currency employed by the International Monetary Fund (IMF) called “special drawing rights” (SDRs). Originally devised at the end of the 1960s to deal with an anticipated, but never realised, shortage of US dollars and gold–the twin bases of the pre-1973 global monetary system–SDRs were long a little-noticed cog in the global economy. In the aftermath of the crisis, however, they achieved new prominence: economists recommended a new allocation to increase global liquidity, and the G20 leaders wisely supported that idea. Their call in April 2009 for a new allocation, the first in 28 years, of $250 billion worth of SDRs was approved and accomplished by the IMF in just over four months.
SDRs were designed to serve as a reserve unit: those assigned to a country are registered as an addition to the country’s overall reserves. An influx of SDRs means that a country suddenly has greater reserve holdings, which makes it more creditworthy and can free up other reserves, such as dollars, for other uses.
But SDRs would not be a persuasive financial instrument if they were simply hash marks in a reserve account. As things stand, the creation of SDRs requires no expenditure of resources; they are backed merely by the determination of the international community as expressed through the IMF board. They assume some tangibility because countries can exchange them for hard currency, usually in one of the four currencies that are averaged to determine the value of SDRs: US dollars, yen, euros, and UK pounds sterling. When they do so, they must pay a relatively small recurring interest charge until they repurchase the SDRs, but otherwise there is no cost.
ActionAid believes that SDRs can be an important resource for developing countries. Even when maintained in their original reserve-unit form, they give governments added flexibility in the use of their reserve resources and bolster their ability to raise other capital. When converted to cash, they are probably the least expensive and least onerous source of capital available to most developing countries, short of outright grants. They can even be preferable to some grants because there are no conditions or restrictions on their use. While the IMF Articles of Agreement make clear that SDRs were not designed for steady use as development finance, it is an option that is made available to countries. Different circumstances in each country, world interest rates and the global availability of capital will determine what the wisest use of SDR resources is, but they cannot be overlooked as a valuable tool for increasing developing countries’ financial flexibility.
One problem with SDRs is that their distribution among IMF member countries is done according to quota, meaning the richest countries get the most. This resulted in sub-Saharan Africa getting only about $11 billion worth of the $250 billion allocation in 2009. This could be addressed with targeted “special” allocations for vulnerable countries, but the process for approval can be quite cumbersome. Another possibility is that rich countries, which have relatively little use for the instruments, can donate their “idle” SDRs to developing countries or to an externally managed fund. This step was taken, in a fashion, by the British and French governments recently, though they actually loaned the proceeds of their SDRs to the IMF for on-lending to developing countries–a process that makes unconditioned, cost-free SDRs into conditioned loans. Eliminating the intermediation of the IMF would preserve the unique attributes of SDRs for developing countries. The donation of “idle” SDRs to an external fund has in fact recently been suggested by the IMF staff, in a proposal for a “green fund” to finance climate-related expenditures.
The need for extraordinary resources for climate finance has inspired several proposals that would employ SDRs as a method of backing “green bonds” or financing adaptation projects. The climate crisis could well serve to open minds about the potential uses of SDRs, and all of these proposals should be further explored. Ultimately, as the UN “Stiglitz Commission” pointed out, the global reserve system itself will require reform. The massive reserves built up by emerging economies in recent years, mostly in order to defend currency values, highlights the absence of trust underlying the system, a problem that has been building since the suspension of the dollar-gold standard in 1973. Massive amounts of capital are in effect frozen by this reserve-building strategy, unavailable for development or other positive uses. Even the most impoverished governments are tethered to economic plans that make building reserves one of their central goals, with most IMF plans for low-income countries demanding that countries maintain reserve levels equivalent to 2.5 to 3 months’ worth of imports.
The reliance on a single country’s currency– the US dollar–as the de facto global standard for reserves and trade insures that the distortions that accompany reserve-building will remain with us. Indeed, most experts believe that the situation would not be much different if there was more equitable reliance on two or three currencies, such as the euro or the yen. Fortunately, some proposals for reform are gathering momentum since the global crisis threw questions about the US dollar into relief as never before.
Most of those proposals, coming from sources such as the Stiglitz Commission, focus on moving toward a new global reserve currency. Such a development would be beneficial if it was a neutral instrument–that is, not a national currency, but one that would be managed by a globally-controlled institution. Such control could include guarding against excessive surpluses and deficits–the imbalances blamed for much of the turmoil in the global economy. It would also eliminate questions of advantages enjoyed by and disadvantages burdening the country issuing the reserve currency.
The SDR is the instrument most frequently pointed to as the likely candidate for becoming a global reserve currency. Its obvious advantage is that it already exists and is accepted. But it also has disadvantages: it is basically an accounting unit dependent on other currencies’ values, and it is managed by the IMF, which is not a global central bank and suffers from contested legitimacy. These problems could be addressed, but it is also possible that a new global central bank could be created and a new super-currency devised. Either way, there remains much to do, both technically and politically, before such plans become reality. But the need is great, and more and more experts believe that we should start the process.
Another proposal comes from the UN Conference on Trade and Development (UNCTAD), which, in essence, has suggested returning to managed exchange rates, in a system that would operate similarly to the Bretton Woods dollargold standard. Its proposed “constant real exchange rate rule” would require that governments co-operate to establish a view on the fundamentals underlying each currency and then agree that its fluctuations in value should not exceed–by an agreed ratio–shifts in inflation. Again, much would need to be worked out on the technical and political levels. But this proposal may be more palatable for some than the creation of a new global institution and currency
ActionAid believes that one of these approaches must urgently be adopted. Both the stability of the global economy and the prospects for equitable development in Africa, Asia, and Latin America depend on it.
ActionAid and Third World Network (2010), “Fruits of the Crisis: Leveraging the Financial and Economic Crisis of 2008-2009 to Secure New Resources for Development and Reform the Global Reserve System”, available at www.actionaid.org/docs/ sdr_reserve_final.pdf
Akyuz, Yilmaz (2009), “Policy response to the global financial crisis: Key issues for developing countries,” South Centre, May 13, available at www.southcentre.org
Ocampo, Jose (2009), “Special Drawing Rights and the Reform of the Global Reserve System,” Intergovernmental Group of Twenty- Four (G24), available at www.g24.org/TGM0909.thm
©OECD Observer No 279 May 2010