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.

References

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