trade and development report, 2015the automatic working of the “price specie flow”mechanism that...

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TRADE AND DEVELOPMENTREPORT, 2015

UNITED NATIONSNew York and Geneva, 2015

Chapter III

SySTEMIC ChALLENGES IN ThE INTERNATIONAL MONETARy SySTEM

Making the international financialarchitecture work for development

Systemic Challenges in the International Monetary System 55

The tensions and troubles in today’s globaleconomyemergefromtheinteractionbetweenweakeffectivedemandandpersistentfinancialinstability.Theglobalfinancialcrisisin2008wasareminderof the economic and social damage that such aninteraction can generate.Muchof the subsequentreform effort has concentrated on repairing bankbalancesheets,strengtheningregulatoryframeworksand improving the resilience of financial institu-tionstoshocksthroughactionsatthenationalandinternationallevels.Thisisanongoingprocess(seechapteriVofthisReport).butthesuccessofsucheffortsiscloselyrelatedtoglob-almacroeconomicforceswhosecurrentweakness stemspartlyfromthemalfunctioningoftheexistinginternationalmonetarysystem(iMS).

Themain functionof theiMS is to contribute towardsglobal macroeconomic andfinancialstabilitybymaintain-ing stable exchange rates, ensuring sustainablecurrent account positions, providing an adequateamountofinternationalliquidityandenablingorderlyadjustmentstoexternalshocks.Theerosionandeven-tualbreakdownofthesystemalongallthesefronts

contributedtotheaccumulationofglobalmacroeco-nomicandfinancialimbalanceswhichfacilitatedthebuild-upofunstablefinancialmarketconditionsthateventuallytriggeredthecrisis(e.g.UnitedNations,2009;Kregel,2010;DorrucciandMcKay,2011;seealsoTDR 2010).

Theglobalspreadofthecrisisfromitsoriginsinthefinancialmarketsofdevelopedcountries,aswell as those countries’ subsequent approaches tocrisismanagement, have revealed the inadequacyof existing global safety nets to dealwith large

adverse shocks.The crisis hasalsorevealedthetendencyofthecurrentiMStocreatesubstantialinstability in the provision ofinternational liquidity1 and itsinability to provide sufficientsupporttotherecoveryofglobalaggregate demand.Moreover,ongoing financial instabilityraisesquestionsabouthowsup-portivetheglobalenvironment

will be for attaining theSustainableDevelopmentGoals(SDGs)thatarecurrentlythesubjectofdebateonthePost-2015DevelopmentAgenda.Allthesefac-torspointtotheneedformorefundamentalreformoftheiMS.

Chapter III

SySTEMIC ChALLENGES IN ThE INTERNATIONAL MONETARy SySTEM

A. Introduction

The current IMS creates substantial instability in the provision of international liquidity and is unable to adequately support global economic recovery.

Trade and Development Report, 201556

Thischapterexamines theweaknessesof thecurrent iMS, and proposes some elements for itsreform.itfocusesonthreefundamentalchallengescommonlyperceivedasconfrontinganyiMS(see,forexample,UnitedNations,2009;ertenandocampo,2012),andexamineshowthesechallengesandtheresponsestothemhavechangedovertime.itsuggeststhatthereformsaimedataddressingtheinadequaciesofthecurrentiMSexposedbytheglobaleconomicandfinancialcrisishavebeentimidatbest.

Thethreefundamentalchallengesare:

• First, regulating the provisionof internationalliquidity.Traditionally,privateandpublicagentsofdifferentcountrieshavewillinglyacceptedoneorseveralnationalcurrenciestouseasaunitofaccount,asameansofpaymentsorasastoreofvalueintheirinternationaleconomicandfinancialactivities.Thedollarhas,predominantly,servedthese purposes since the end of the SecondWorldWar,but thishasbeenassociatedwithlargeswingsintheavailabilityofinternationalliquidity and in exchange rates. Furthermorefinancialglobalizationandtheincreasingroleofprivatefinancialintermediariesintheprovisionofinternationalliquidityhavecompoundedthecomplexityofthischallenge.

• Second,providingaccesstoshort-termliquid-ity formanaging shocks.2The internationalMonetaryFund(iMF)wasdesignedtoprovidesuchfinanceinordertopreventcountriesfromresorting to a combination of trade restric-tions and competitive currency devaluations.However, developing countries have increas-ingly shunned iMF assistance, especiallyfollowing theAsian crisis in 1997–1998, infavourofaccumulatinglargeforeign-exchangereservesasaformofself-insuranceandafirstlineofdefenceagainstexternalshocks.

• Third, ensuring amore equitable sharing oftheburdenofcurrentaccountadjustment.3Theasymmetric adjustment process implied by

curtailedspendinginthedeficitcountrieswith-outoffsettingspendingincreasesinthesurpluscountries represents the so-called “contrac-tionarybias”oftheiMS.Thishasparticularlyundesirableimpactsonglobalmacroeconomicdynamismwhenglobaloutputgrowthisalreadyanaemic,asiscurrentlythecase.

Thischaptersuggeststhattheincreasedroleofshort-termprivateinternationalcapitalintheprovi-sionofinternationalliquidityhascausedboom-bustcycles,andhasleddevelopingcountriestoaccumu-latelargeamountsofforeignexchangereservesinspiteoftheinequitythattheassociatedtransferofresourcestoreserve-currencycountriesimplies.initscurrentform,theiMSwillcontinuetogeneratebothinstabilityandinequity,andforcedevelopingcountriestoadjusttotheeffectsofpoliciesbeyondtheirowncontrol.

Thechapterdoesnotprovideacomprehensiveblueprintforreform.Rather,itfocusesonthemajordifficultiesinmeetingthethreechallengesdescribedabove,anddiscussesvariousproposalsaswellastheconditionsrequiredtoimplementthoseproposals.

Thechapterisorganizedasfollows.Sectionboffersahistoricalaccountofthewayinwhichsuc-cessiveformsoftheiMShaveaddressedthethreechallengesmentionedabove.italsoexamineshowthepost-brettonWoods era has accentuated thesechallenges.onthebasisofthisanalysis,sectionCevaluatesanumberofproposalsforacomprehensivereformoftheexistingiMSthatwouldleadtoanew,centrallyadministerediMS,aswellassomemoreincrementalchangeswhichmightbeeasiertoimple-ment.Thediscussionofsuchincrementalchangesincludesproactivemeasuresthatdevelopingcoun-triescouldtaketobetterattaintheirdevelopmentalgoals.Thewaysinwhichgreaterregionalmonetarycooperation could help dealwith the contraction-arybiasoftheiMSandprovidesteppingstonesformorecomprehensivereformsinthefuturearealsodiscussed.SectionDsummarizesthemainconclu-sionsandsetsoutapolicyagenda.


Anyinternationalmonetarysystemwillfacethethreechallengesnotedabove.Theprevailingglobaleconomicandinstitutionalsituationdetermineshowthesechallengesmanifestthemselves,aswellasthenatureandeffectivenessof the responses to them.Thisisthefocusofthissection.

1. The gold standard and the Bretton Woods system

Theclassicalgoldstandard,whichlastedfromaround 1880 to the beginning of the FirstWorldWar, supposedlymanaged these three challengesby linking the provisionof global liquidity to thephysical availability of gold, andmaking pricesadjusttochangesinthedomesticstockofgoldthatresulted frommovements on the current account.However, itsactualfunctioningdidnotdependonthe automaticworking of the“pricespecieflow”mechanismthat was designed to ensuresymmetricadjustment;rather,itdependedonthedominantroleplayedbytheUnitedKingdomas themajor source of globalcapital flows at that time andthe entrepot forworld trade,andthereforebythesetofcom-mercial,financialandpoliticalnetworkscentredontheCityoflondon(seeTriffin,1961;deCecco,1974;Panic,1992;andeichengreen,1992).Thisenabledaperiodofrelativeeconomicstabilityintheglobaleconomy,alongwithlargecross-borderflowsofcapital(andpeople)andexpandingtradeflows.However,stabilitywasconcentratedincountriesthatcametoconstitute

the“core”oftheworldeconomy.ContinuouscapitalflowsfromtheUnitedKingdomensuredthatsomecountries,suchastheUnitedStates,couldrunlargecurrentaccountdeficitsforprolongedperiods,whiledeveloping countrieswith current account deficitsexperiencedmuchgreatervolatilityofcapitalflowsandmore damaging adjustment because surpluscountriesdidnotfeelthepressuretoadjust.Thesys-temcollapsedontheeveoftheFirstWorldWar,bywhichtimeitwasevidentthatthemajoreconomies− andparticularly theUnitedKingdom−hadnotadheredtotherulesandhadexpandedtheirdomesticmonetarybasefarbeyondwhatwasjustifiedbytheirgoldholdings.

efforts to re-establishgold standard arrange-mentsaftertheFirstWorldWarconfrontedthedualproblemsof higher nominal prices resulting fromwartimeinflationandtheshiftingpositionsofcredi-torsanddebtors.ThisaffectedtheabilityoftheUnitedKingdomtotakeonthemantleofglobaleconomic

leadership.Withtheburdenofadjustment falling heavily onthedeficit countries, includingtheUnitedKingdom, this sys-temprovedtobeimpossibletomaintain.TheUnitedKingdommoved to themassively over-valued pre-war exchange-rateparityin1925,andwaseventu-allyforcedtoexitfromthegoldexchange standard in 1931. italsomeantthatthesurpluscoun-

triesprovidednoexpansionaryimpulsetotheworldeconomythatcouldhaveoffset thecontractionarymeasures that the other countrieswere obliged toadoptasaresultofthedeclineintheirgoldstocks.Thecombinationofthesefactorshadahugecontrac-tionaryeffectontheworldeconomythatcontributed

B. The international monetary system: Main challenges and evolving responses

The Bretton Woods conference aimed at a system that would prevent the restrictive trade practices and competitive devaluations of the interwar period.


totheGreatDepression,leadingtosharppricefallsandthethreatofdebtdeflation(eichengreen,1992).

insteadofengaginginexpansionarymacroeco-nomicpoliciesinacoordinatedway,manycountriesrespondedtothisbyabandoningthegold-exchangestandardanddevaluingtheircurrenciesinanefforttoboostnetexports,andbyresortingtoprotectionistmeasurestorestrictimports.However,onecountry’sadditionalexportsareanothercountry’sadditionalimports.Thus theneteffectof suchabeggar-thy-neighbourpolicywasheightenedvolatilityofboththeexchangerateandoutput,whichdepressedinterna-tionaltradeandexacerbatedthefallinglobaldemand.

Finding an international system thatwouldpreventtherestrictivetradepracticesandcompeti-tivedevaluationsoftheinterwarperiodwasakeyobjectiveofthebrettonWoodsConferencein1944.Conferenceparticipantsalsosoughttoeliminategoldasthemonetarybaseanddeterminantofexchangerates,anddiscussedwhetherandhowtheburdenofadjustmentshouldbesharedmoreequallybetweensurplusanddeficitcountries.

As is well known, the post-war iMS thatemergedfromthebrettonWoodsConferencelargelyfollowedthewishesofthedominantcreditorcoun-try,theUnitedStates.itsmainfeaturewasagridoffixedexchangeratesbetweenthedollarandallothercurrencies,combinedwiththepossibilityforcentralbankstoconvertdollarsintogoldatafixedparityof$35perounce.Theexchange-rateparitiescouldbechangedonlyincasesoffundamentaldisequilibrium,therebypreventingthecompetitivedevaluationsthattook place during the interwar period.However,thisalsoimpliedthatadjustmentthroughprices(i.e.exchange-ratechanges)rarelyoccurred,4takingplaceinsteadthroughchangesinquantities(i.e.changesindomesticdemand).

The system also sought to limit the size ofexternal imbalances, and thus theneed for capitalflowstofinanceexternaldeficits.ThiswasachievedbyprovidingloanstodeficitcountriesoutofnationalcurrenciescontributedtothenewlyestablishediMFbyitsmembers,subjecttoconditionsdeterminedbythe iMF’sboardofGovernors.However,becausetheseconditionswouldonlyapplytodeficitcoun-triesrequestingassistance,andbecauseiMFloanstodeficitcountrieswereaccompaniedbystrictpolicyconditionalities,includingrequirementsforcurrency

devaluationandmonetaryandfiscalcontraction,thesystemexhibitedacontractionarybiasatoddswiththe original intention of the architects ofbrettonWoods.

bytheearly1960s, thestockofforeign-helddollars started to exceed the value of theUnitedStates’goldholdingsintermsofitsdeclaredparityof$35perounce.Thisgaverisetowhatisknownasthe“Triffindilemma”:shouldtheUnitedStatesnolongerprovidedollarstoothercountries,globaltradeandincomewouldriskstagnation,butifitcontinuedlubricating tradeandgrowth throughanunlimitedprovisionofdollars,confidenceinitscommitmenttoconvertthedollarsintogoldatthefixedpricewouldbe eroded.one attempted solution to theTriffindilemmawas thecreationofanartificialcurrencyknown asSpecialDrawingRights (SDRs),whichhasgivencentralbanks the right toobtaindollarsorotherinternationallywidelyusedcurrenciesfromtheiMFwithoutconditionsattached.TheseSDRswereintendedtobeusedbycountriestosupporttheirexpandingtradeandpaymentswithoutrequiringthecreationofadditionaldollars.butwhentheseunitsfinallybecameavailableinJanuary1970,thisreformprovedtobetoolittle,toolate.

2. The post-Bretton Woods era

TheUnitedStates unilaterally suspended theconvertibilityofthedollarintogoldon15August1971.ThebrettonWoodssystemoffixedexchangeratesfinallycollapsedin1973,andflexibleexchangeratesbecamethenorm,withtheiMF’sArticlesofAgreementamendedtolegitimizefloatingexchangerates.5Atthesametime,theiMFwascalleduponto “exercise firm surveillance over the exchangeratepoliciesofmembers”withaviewtopreventingcompetitivedepreciationsandsustainedundervalua-tion,whilemakingtheadjustmentmechanismmoresymmetrical.

inadditiontotheabandonmentofdollarcon-vertibilityintogoldandtheadoptionofwidespreadfloating, the other core characteristic of the post-brettonWoods era is a change in themodalitiesunderwhichliquidityisprovided.Thegrowingroleofoftenshort-termprivateinternationalcapitalflowsasacomplementtoliquiditysuppliedthroughcurrentaccountdeficitsoftheUnitedStateshasimpliedthat


theprovisionofgloballiquidityisnolongerlimitedtowhatmaybecalled“officialliquidity”,i.e.“thefund-ingthatisunconditionallyavailabletosettleclaimsthroughmonetaryauthorities”(biS,2011:4).officialliquiditycanbemobilizedfromaccumulatedforeign-exchangereserves,fromswaplinesbetweencentralbanks,andfromtheiMFthroughSDRallocationsorloanagreements.itcanbeandhasincreasinglybeenaugmentedby“privateliquidity”resultingfromcross-border operations of financial institutions,suchasbanks,andnon-financial institutions,suchasenterprisesthatprovidecross-bordercreditsand/or foreign-currency-denominated loans.6This haseffectivelymeant themergingof the internationalmonetaryandfinancialsystems.

Thecombinationoffloatingexchangeratesandthegradualliberalizationandincreasingroleofinter-nationalcapitalflowsinthepro-visionofinternationalliquiditywasexpectedtoreducethepres-sureondeficitcountriestomakeadjustmentsthroughchangesinquantities(i.e.reduceddomesticdemand),givinggreaterweightinstead to adjustment throughprices(i.e.exchangeratechang-es),includingthroughcurrencyappreciation by surplus coun-tries.Thiswasconsideredparticularlyimportantinthecontextofsubstantiallygreaterinternationalcapi-talflowsfollowingthesharpincreaseinoilprices.itwasalsoexpectedthatthesemarket-friendlymecha-nismswoulddiscouragecountriesfromaccumulat-ingever-increasingofficialreserves,whileaccordingeachcountrythenecessaryautonomytopursueitsdomesticmacroeconomicpolicygoals.

However, contrary to these expectations, thepost-brettonWoods era has seen recurrent andsignificant exchange-rate swings, large paymentsimbalancesandgrowingreserveholdings.Moreover,thenewelementsoftheiMShavefailedtoremovethecontractionarybiasassociatedwith thegreaterpressureondeficitthanonsurpluscountriestoadjustpaymentsimbalances,andtheliberalizationofinter-nationalcapitalflowshasintroducednewformsofinstabilityassociatedwiththeinherentvolatilityandprocyclicalityofprivatecapitalflows.

Priortotheglobalfinancialcrisisthatbeganin2008,bankloansconstitutedthebulkofdollarcredit.

european banks (mainly fromFrance,Germany,SwitzerlandandtheUnitedKingdom)accountedforonethirdoftheglobaldollarbankingmarket,astheysearchedfor(supposedly)safeassetswithminimumcapitalrequirements,suchastheasset-basedsecuri-tiesissuedbyUnitedStatesbanks(borioetal.,2014).Thismayalsoindicatethattheroleofeuropeanbanksinfinancingthepre-crisiscreditboomintheUnitedStatesexceededthatrelatedtodevelopingcountries’accumulation of foreign exchange reserves in theformofUnitedStatesTreasury securities, despitethese countries’ often large trade surpluses. Sincethecrisis,bycontrast,mostof thesedollarcreditshavebeenintheformofbondsissuedbyfirmsandgovernmentsotherthanthoseoftheUnitedStates.A recent evaluation byMcCauley et al. (2015)estimates that the dollar credit to non-financialborrowers outside theUnited States, comprising

outstanding bank loans andbonds,amountedto$8trillioninmid-2014,equivalentto13percentofglobaloutputexcludingthatoftheUnitedStates.7Thisamountofoffshoredollarcreditconsiderably exceeds its euroandyencounterparts that total$2.5 trillion and $0.6 trillionrespectively.Another notablefeatureistheconsiderablyfaster

expansionofdollarcredittoborrowersoutsidetheUnitedStatesrelativetothatofdomesticcredit,bothbetween2005andtheonsetofthefinancialcrisis,aswellassince2009.

Thereareseveralconsequencesofthissurgeofprivatelycreatedgloballiquidity.First,theprovisionofinternationalliquidityhasbecomeprocyclicalandunstableasprivatecapitalflowsaresubjecttoglobalfinancialcyclesdrivenbypushfactors,suchasfinan-cialinvestors’searchforhigheryields,theircapacitytoleverage,andadvancedcountries’monetarypolicydecisions.The share of total private internationalcapitalthatflowstoanindividualcountryisinflu-encedbythatcountry’spullfactors,suchasitsgrowthexpectationsandexternalfinancingneeds,aswellasbytheopennessofitscapitalaccount(e.g.Rey,2013;Ghoshetal.,2014).inboomperiods,privateliquiditycreationwillaugmentofficialliquidity.incrisisperi-ods,bycontrast,financialinvestors’riskappetiteandcapacitytoleveragetendtodeclinecausingaslumpintheavailabilityofprivateinternationalliquidity.Thisprocyclicalityofprivatecapitalflowsposesthe

Short-term private international capital flows have assumed a growing role in the provision of international liquidity, and make it procyclical and unstable. ...


riskthatwhencountriesfacethemostsevereliquid-ityshortages,theprovisionofinternationalliquidityshrinks,leavingmainlyitsofficialcomponentintact.

Second, the increased provision of privateliquidityimpliesthatcountrieswithcurrentaccountdeficits can avoid adjustment as long as they canaccess sufficient private lending.but this is oftenattheexpenseofaggravatingprocyclicalpressuresanddisconnectingexchange-ratemovements fromunderlying fundamentals.Unless capital inflowsarecontainedorcentralbanksinterveneincurrencymarketstopreventthecapitalinflowsfromcausinganappreciationoftheircurrency,therearenoeco-nomicorinstitutionalmechanismsthatwouldlimitthisself-reinforcingprocessleadingtogrowingtradedeficitsandcapitalinflows,otherthantheconfidenceofglobalfinancialmarketsinthesustainabilityoftheprocess–whicheventuallyvanishes.

Third,grosscapitalflowsaremorerelevantthannetflows(ordevelopmentsinthequanti-tiesandpricesoftradedgoodsandservices)inexplainingbal-ance-of-payments crises.Theyalsoaffectcurrentaccountbal-ances, since large gross assetandliabilitypositionsgeneratesignificantinvestmentincomeflows.Theirnetimpactonthecurrentaccounttendstobenegativefordevel-opingcountries,owingnotonlytofinancialliabilitiesbeing,ingeneral,largerthanassets,butalsotothedifferencebetweentheinterestratespaidandearned.

Moreover, ifgrossinflowsstopsuddenlyandgrossoutflowssurgesimultaneously,acountrywillexperienceanadverseshockintermsofnetcapitalflows,whichisequivalenttoadeteriorationofthecurrentaccount in termsofcausingexchange ratechanges.Thesechangescanbeparticularlydamag-ingiftherearelargecurrencymismatchesinbalancesheets; and sharpdeclines in the exchange rate inturncanresultinincreaseddebtservicingdifficul-tiesanddefaults.Thiswillbethecase,inparticular,when suchbalance-sheetmismatchesoccur in theprivatesectorforwhichforeign-exchangereservescannotbereadilymobilizedtocompensateforliquid-ityshortages.

Sincethe1970s,therehasbeenasequenceoffinancialcrisesinemergingmarketeconomiesthat

werecloselylinkedtosuddenchangesinthedirec-tionof private capitalflows (see chapter ii).Thisexperience led financially integrated developingcountriestoaccumulateofficialliquidityintheformofforeign-exchangereservesfortworeasons:first,asaformofself-insuranceinordertocompensateforeventualliquidityshortagesarisingfromasud-denstopandreversalofcapitalflows;andsecond,asaby-productofinterventioninforeign-exchangemarkets designed to avoid currency appreciationresultingfromcapitalinflowsthatareunrelatedtothefinancing of imports.Thismeans that reserveaccumulationcantoalargeextentbeconsideredapolicymeasureaimedatmitigatingadverseeffectsonthedomesticeconomyemanatingfromprocycli-calinternationalcapitalflows.

Arelatedobjectiveofthisstrategyistoavoidrelianceon the iMF in crisis situations, given the

severe macroeconomic con-tractioncaused,toasignificantextent,bypolicyconditionalityattachedtoiMFloans.Suchcon-ditionalityisoftenbasedonaninappropriateassessmentoftheunderlyingproblem,asalsorec-ognizedbytheiMFitself(TDRs 2001and2011;iMF,2011a).

Theaccumulationofforeign-exchangereservescan also reflect non-precautionarymotives, suchasacountry’schoiceofexchange-rateregimeandspecificmacroeconomicstrategies.Thishasplayedan important role for those countries that supportdomesticgrowththroughnetexportpromotionandrelyoninterventiononforeign-exchangemarketstomaintainexternalcompetitiveness.Suchexport-ledgrowthstrategieshavesometimesresultedinlargecurrentaccountsurpluses.

Thetotalholdingsofforeign-exchangereserveshavegrownsharplysincethebeginningofthemil-lennium,amountingtoalmost$12trillionin2014(chart3.1).Developingcountriesaccountedformostoftheincrease,whichwasparticularlylargeinChina.in2014,Chinaheldaboutonethirdoftheworld’stotalforeign-exchangereservesandroughly45percentofthoseofdevelopingcountries.8

These reserve stocks have sometimes beenjudged“excessive”basedonconventionalmeasures,such as the levels needed to counter fluctuations

... In response, developing countries are seeking to accumulate sizeable foreign-exchange reserves for self-insurance. ...


inexportearningsortorollovershort-term(uptoone year) external debt (the so-called “Guidotti-Greenspan” prescription of reserve adequacy).However,empiricalestimatessuggestthatfinancialopenness,desiredexchange-ratestabilityandthesizeofthedomesticbankingsystemareadditionalconsid-erationsindeterminingtheadequacyofreserves.incrisissituations,policymakersattemptingtoavoidormitigatecurrencydepreciationmayneedtocountera large and suddenwithdrawal of liquid domesticdeposits(i.e.“suddencapitalflight”)inadditiontostemmingdepreciationpressurefromsuddenstopsand reversals of foreign financial inflows.Thisimplies that a determination of reserve adequacydiffers by the type of economy.9 For financiallyintegrateddevelopingeconomies,reserveadequacymaybedeterminedbytheGuidotti-Greenspanrule,aswellasbythesizeofbroadmoneyasapotentialsourceofcapitalflightby residents.Forcountriessuch asmany least developed countries (lDCs),whicharelessintegratedinglobalfinancialmarkets,the traditional trade-related rules remainpracticalstartingpointsbeyondwhichcountry-specific fac-tors determine precise assessments. in developed

economies,reserveadequacywilldependonwhethertheyhavereadyaccess toothersourcesofofficialinternational liquidity for these purposes (such asthrough standing foreign currency swap arrange-mentsamongcentralbanks,asdiscussedinthenextsection).otherwise,theyneedtorelyonreservestolowertheriskstobankandnon-bankbalancesheetsresultingfromshortagesindollarliquidityandrelateddysfunctioningof their foreign-exchangemarkets,aswellastocontainadverseeffectsoncesuchsitu-ationsoccur (for furtherdetails, see, for example,iMF,2015b).

Thelargesizeofcountries’foreign-exchangereserveshasgivenrisetoanewformoftheTriffindilemma.Theoriginal dilemmawas linked to thesize of official dollar reserves and the confidenceoftheirholdersthattheUnitedStatescouldconverttheseholdingsintogoldatthefixedprice.Thenewformof the dilemma refers to the combinationoftwomechanisms:first,thepersistentaccumulationofforeign-exchangereservesisassociatedwiththecontinuedpurchaseofsupposedlysafeassetsintheformofgovernmentsecuritiesinthereserve-currency

Chart 3.1

FOREIGN ExChANGE hOLDINGS OF SELECTED COUNTRy GROUPS, by CURRENCy DENOMINATION, 1995–2014

(Billions of current dollars)

Source: UNCTAD secretariat calculations, based on IMF, 2015a.Note: Since data for the composition of China’s foreign-exchange reserves are not publicly available, in the chart those reserves

have been allocated for the entire period based on estimates for 2014 (Financial Times, 15 April 2014), with about two-thirds in dollars, a quarter in euros, and the rest in other currencies.

0

2 000

4 000

6 000

8 000

10 000

12 000

1995 2000 2005 2010

Emerging and developing economies – unallocated reserves

Emerging and developing economies – other currencies

Emerging and developing economies – euros

Emerging and developing economies – dollars

Developed economies – unallocated reserves

Developed economies – other currencies

Developed economies – euros

2014

Developed economies – dollars


countries; and second, this requires confidence oftheholdersoftheseforeign-exchangereservesthatTreasurysecuritiesandreservecurrencieswillnotdepreciate,asthiswouldimplyadeclineinthepur-chasingpoweroftheirreserves(AgliettaandCoudert,2014).10inthemediumtolongrun,thestatusofthedollarasthemaininternationalcurrencywillpartlydependonthefuturefiscalpoliciesandperformanceoftheUnitedStatesandothersignificanteconomies(eichengreen,2011),andpartlyontheavailabilityofalternativesthatcouldchallengeitsrole.

Suchalternativesarenotyetevident.TheglobalfinancialcrisisthatbeganintheUnitedStatesin2008mayhavebeenexpectedtoseriouslychallengethedollar’sinternationalrole.11Yetthedollar’spredomi-nance as an international currency remains intact,and has, if anything, actuallystrengthenedsincetheonsetofthe crisis (e.g. Prasad, 2013).There has beennodiscerniblediversification away from theuseofthedollarintheinvoicingofinternationaltrade(GoldbergandTille,2008;Auboin,2012).12Moreover,ithasmaintaineditsdominanceinforeign-exchangemarkets,asitcontinuestobeusedinover85percentofforeign-exchangetransactionsworldwide,eitheron both sides of the transactions or in exchangesbetweenthedollarandothercurrencies(biS,2014;Goldberg,2011).13Thedollaralsocontinuestobethecentralcurrencyintheexchange-ratearrangementsofmanycountries,andisstilldominant incentralbanks’ foreign-exchange reserves, accounting forroughlytwothirdsoftheirreportedcompositionin

bothdevelopedanddevelopingcountries(chart3.1).Moreover,thedollarremainsthemajorcurrencyusedininternationalcapitalmarkets.

Tosumup,thissectionsuggeststhatthecurrentdollarstandardisbothunstableandinequitable.Thecombinationofwidespreadfloatingandthesizeableroleofprivateinternationalcapitalflowsintheprovi-sionofinternationalliquidity,withmacroeconomicpolicieslargelybasedonnationalpriorities,hasbeenaccompaniedbywideswingsintheavailabilityofinternationalliquidityandtheaccumulationofoftenwide external imbalanceswhose adjustment hasgenerally occurred through crisis.Hence, the cur-rentsystemhasfailedtoprovideareasonablelevelof globalmacroeconomic and financial stability.Financially integrated developing countries have

chosentoaddressthisshortcom-ingthroughtheaccumulationofsubstantial foreign-exchangereserves, in spite of the asso-ciated transfer of resourcesto reserve-currency countriesthatmakes the system highlyinequitable.14Theaccumulationof large external imbalances– frequently associatedwith

volatilecapitalflows–andtheirdisorderlyunwind-ingpointtotheneedforimposinglimitsonthesizeofsuchimbalances.Theyalsosuggesttheneedforgloballymoreefficient formsof foreign-currency-denominatedliquidityprovision,especiallyincrisissituations,tocomplement−andeventuallyreplace−largeholdingsofforeign-exchangereservesheldforprecautionarypurposes.Theseaspectsareexaminedinthenextsection.

... However, the associated resource transfers to reserve-currency countries make the IMS highly inequitable.


Themany existing proposals for reformingthe iMSgenerally exhibit an inverse relationshipbetween comprehensiveness and feasibility.ThisisparticularlytrueofproposalsthataimtotaketheiMSbacktoamorerules-basedandmultilaterallycoordinated systemdesigned to address all of thethreechallengesmentionedintheintroduction.Mostoftheseproposalshavealonghistory,andsurfaceperiodicallyaftereverymajorinternationalfinancialcrisis.Thisisnotsurprising.indeed,theyserveasabenchmarkformoreincrementalbutfeasiblereformmeasures thatmay achieve consensus in the nearterm.Arelatedquestioniswhetherthecurrentunsat-isfactoryglobaleconomicsituationwillimprovethechances of political acceptance of comprehensivereformsandproducethehighdegreeofmultilateralagreementandmacroeconomicpolicycoordinationtheywouldnecessitate.

Thissectionstartsbydiscussingsomeofthesecomprehensiveproposals.itthenfocusesonasecondcategoryoflessambitiousproposals,butwhichcouldbemoreeasilyimplemented.Thissecondcategorygenerally considers reformswhich, in addition toincreasingthesupplyofsafeassets,andespeciallythe availability of official liquidity duringperiodsof crisis, should aim at curbing the role of short-termprivatecapitalflowsinprovidinginternationalliquidity.Thiswould reduce both the demand forforeign-exchange reserves and the accumulationofunsustainablecurrentaccountimbalances.Suchreformsalsoseemwell-suitedtobecombinedwithmeasures designed to increase the contributionofsurpluscountriestoadjustment.Variouspossibilitiesattheregionalleveloracrossgroupsofcountries,suchasliquidityprovision,policysurveillanceandmechanismsforthesharingoftheburdenofadjust-ment,arealsoconsidered.Adoptingsuchmeasuresat the regional or interregional levelmay be an

improvement on the current system that subjectsdevelopingcountriestodisorderlyadjustmentpres-sureandrequiresthemtoholdlargeforeignexchangereserves, thereby exposing them to the system’sinequity.Theseproposalsforgreaterregionalmon-etaryintegrationamongdevelopingcountriesmightbemorepoliticallyfeasibleatthepresentjuncturethancomprehensiveglobalreforms,whilealsopre-paringthegroundforglobalreformsinthefuture.

Thissectiondoesnotaimatprovidingablue-printforanewiMS;rather,itexamineshowfeaturesofexistingproposalsaddressthethreeeternalchal-lengesofaniMS.italsodiscusseswhatconditionswouldneedtobemetinorderfortheseproposalstobeimplementedsoastolaythefoundationsforglobalmacroeconomicandfinancialstability.

1. Creating a new global monetary order

Proposalsforanewglobalmonetaryorderoftenemphasizetheneedforaworldcurrency,andusu-allystartfromthepremisethatthemanagedfloatingregimeofthepost-brettonWoodserahasnotliveduptoexpectations.extremeexchangerategyrationshave been identified as amajor systemic defect,posingaconstantthreattothesmoothexpansionofglobaltradeandincomes(Mundell,2012).

Creatingaworldcurrencyisseenbysome(e.g.Mundell, 2012) as following a natural sequence,from establishing target zones for the threemainreserve currencies, followed by amulti-currencymonetaryunionwhichwouldlockinexchangerates,fix an inflation target, establish a jointmonetarypolicycommitteeandcreateanarrangementforthe

C. Reforming the international monetary system


coordinationoffiscalpolicies,toaworldcurrencyinitiallyrepresentingaweightedbasketofthethreemain currencies, but gradually extended to othercountries.15lin(2013)haspresentedanalternativeproposalforaworldcurrency,wherebythesupplyof the newly created globalcurrencywould be governedby an international treaty andaugmented according to somewell-defined rule. itwould becombined with a system offixed,butadjustable,exchangeratesbetweentheglobalcurren-cy and all national currencies.Whilerecognizingthatsimilarproposalshavehadlimited traction in thepast, their supporters arguethatboththeincreasedfrequencyofcurrencycrisesandthedecliningweightoftheUnitedStatesintheworldeconomycouldconvincecountriesthatsuchareconstructediMSwouldbeintheirowninterestsaswellasintheinterestofglobaleconomicstability(Mundell,2012).

Theadverseeffectsofexchange-ratemisalign-mentsontradeflowshavealsogivenrisetoproposalsformultilateral exchange-rate coordination. Suchproposalsmaysimplymarkasteptowardsaworldcurrency(i.e.thefirststageintheschemeadvancedbyMundell).buttotheextentthatsuchaspirationsseemdifficulttofulfil,searchingforanappropriatesystemofexchange-ratemanagementconstitutesareformagendainitself.16Thisisparticularlytrueifexchange-ratepolicycoordinationfollowsrulesthatpreventtheaccumulationoflargeexternaldeficitsresultingfrom cross-country price andcostdifferentials.Thus,themainobjectivewould be to designan exchange-rate system thataimsatstablerealexchangeratesandglobalmacro-economicstability(TDRs 2009and 2011).

Focusinginternationalpolicycoordinationonexchange-ratemanagementhassomeadvantages.Forexample,itcanrelyoncountries’obligationsunderArticleiVoftheiMF’sArticlesofAgreementtocol-laboratewithaviewto“assuringorderlyexchangearrangements” and “promoting a stable systemofexchange rates”.Moreover,multilaterally agreedexchange rateswould provide a consistent set ofmultilaterallyagreedexternalpositionsofindividual

countries. indeed, the few instances of effectiveinternationalpolicycoordinationhavebeenmostlyassociatedwithcorrectingexchange-ratemisalign-ments,suchasthroughthePlazaAgreementandthelouvreAccordinthe1980s.However,anycoordi-

nationofexchange-ratepolicieswill invariably facesignificantproblemsindefiningthecriteriatobeusedbothtosettheinitialtargetratesandtochangethem,in identifying the causes thatunderlieanywidedivergenceofactualfromtargetedrates,andindeterminingwhether targets

shouldbeadjusted.17inaddition,thereisalsoten-sionbetweenthelossofpolicyautonomytowhichpolicymakerswouldneedtoagree,andthedegreeof policy coordination required tomaintain theexchangerateswithinabandthatprovidesreasonableexchange-ratestability.Theabsenceofregulationsoninternationalcapitalmovementswouldmakesuchcoordinationdifficult ifnot impossible.Moreover,thecurrentsimultaneousattemptsbymanycentralbankstoengineercurrencydepreciationssuggestthattheexchangerateremainsamajorpolicytoolusedpredominantlytosupportnationaleconomicinterests.

Thedryingupofprivateliquidityduringfinan-cialcrisesandconstraintsontherapidprovisionofofficialliquidityforemergencyfinancehaveledtorenewedinterestinmovingtowardsamorediversi-

fiediMS.Thiswouldentailthecurrent dollar standard beingreplaced by amulti-currencysystem,witharangeofinterna-tionalcurrencies–suchas thedollar, the euro, the renminbiand possibly other currencyunits–playingamoreimportantrole. Some observers believe

suchasystemwouldofferseveraladvantages(see,forexample,Farhietal.,2011;lee,2014)intermsofmore elastic liquidity provisioning and easingtheTriffindilemma.Theysuggestitwouldprovidealternativesforcountriestodiversifytheirforeign-exchange reserves, exert greater discipline on thepoliciesofthereserve-currencycountriesandpreventtheirissuersfromabusingthesupposedexorbitantprivilegeofissuingareservecurrencytobolsternar-rownationalinterestsoverbroaderglobalinterests.inaddition,rejectingtheideaofnetworkexternali-tiesintheuseofjustoneinternationalcurrency,a

There is an inverse relation-ship between comprehensive and feasible reforms.

New multilateral arrange-ments remain the long-term objective of any comprehen-sive reform.


multi-currencysystemmaybeeconomicallymoreefficient,becauseusingmultiplecurrencieswouldbettermatcheconomictransactionsbetweencurrencyblocks,resultinginsavingsontransactioncosts.Aspointedoutbysomeauthors,historyhasseenmanyepisodesofcoexistinginternationalcurrencies(e.g.eichengreen,2005).

others havenoted that any central bank thatissuesaninternationalcurrencytakesdecisionsbasedsolely on national concerns, rather than concernsrelated to the needs of the international paymentssystemandtheworldeconomy.Thisproblemalsoexistsinamulti-currencysystem.Moreover,thesup-poseddiscipliningeffectfromcurrencycompetitioncanoccuronlyifthereisclosesubstitutability.butifthisisthecase,thereistheriskofabruptand substantial exchange-ratechanges,notonlyinthetransi-tionperiod,whencentralbankswilldiversifytheirreserveport-folios,butalsooncesuchasys-temhasbeenestablished.Thisisbecauseamulti-currencysys-temwouldincreasetheriskthat,whenconfrontedbyorinantic-ipationofanyeventthatmightadverselyaffectthevalue of their portfolios, reserve-currency holderswouldtrytorapidlyconverttheirholdingsfromonecurrencyintoanotheraheadofotherholders.Thisconversioncouldbeinterpretedbytheotherholdersassignallinganimminentcrisisandcausethemtorapidly convert their ownportfolios aswell.Theoverallresultwouldbesubstantialvolatilityintheexchangeratesofthereserve-currencycountries.

inaddition toquerying the systemic stabilityofamultipolarmonetarysystem,therewouldbethequestionofwhichcurrencieswouldcombinewiththedollar.Marketforcesplayanimportantroleintheincreaseduseofacurrencyasaninternationalcurrency,thoughpolicymakershaveattimestriedtofoster,orhinder,theuseoftheircountry’scurrencyinsuchaway(Roosa,1982).18Morerecently,andespeciallyuntil thebeginningof theeurocrisis in2011,theeuroappearedtobeaseriouschallengertothedollar’sdominantpositionasaninternationalcurrency.Thischallengewasbasedontheeconomicsizeoftheeuroarea,whichiscomparabletothatoftheUnitedStates,aswellastheamountofitsglobalexports.Moreover,theeuroareahaswell-developed

financialmarketswithbanksthatoperateinternation-ally.ontheotherhand,whiletheeuroareapossessesanample stockofgovernmentdebt securities, theeuroisbackedbyaheterogeneousgroupofcoun-triesthatareunitedbyalooselystructuredfederalarrangement,andthereisnohomogeneousmarketforgovernmentdebtsecurities.Moreover,theStabilityandGrowthPactandtheexclusivefocusoftheman-dateoftheeuropeanCentralbank(eCb)onpricestability hindermember States fromundertakingthe kindof expansionarymacroeconomicpoliciesthatreserve-currencycountriesmightneedtooffsettheadverseoutputandemploymenteffectsarisingfrom the current account deficits associatedwithothercountries’demandsforsafeassetsintheform

ofgovernment securities.Thispresents a serious challenge,especiallybecauseofthecurrentlackofeconomicdynamismintheeuroarea.

Agreaterinternationalroleoftherenminbiseemstobealog-icalcorollarytoChina’sgrowingweight in theworld economy.Since 2009, renminbi interna-tionalization has been active-

lypromotedbytheChineseGovernment,partlyinreactiontotheslowpaceofAsianregionalfinancialcooperationandtheinternationalcommunity’sappar-entlackofinterestinreformingtheiMS,aswellastoavoidsignificantcapitallossesintheircountry’sforeign-exchangereserves(Yu,2014).19Moreover,China isstarting toreap theassociatedbenefitsoftherenminbi’sinternationalization,includinglowertransactioncostsintradeandareducedneedforaccu-mulatingadditionalforeign-exchangereserves.itisworthnotinginthiscontext,thatinitsquinquennialSDRreviewscheduledtotakeplaceinlate2015,theiMFboardofGovernorswillconsiderincludingtherenminbiinthecurrencybasketthatformstheSDR.Thiswillrequireanevaluationofwhethertheren-minbiisbeingsufficientlywidelyused,andwheth-eritis“freelyusable”(Zhou,2015;iMF,2011b).

Nevertheless,itiswidelybelievedthatpromot-ing renminbi internationalizationwhile avoidingan undue increase inChina’s exposure to finan-cial instabilityfaceschallenges. itwill require therelaxationofforeign-exchangecontrolsandfurtherdomesticfinancialmarketreform,promotingcapi-tal account convertibility,20 greater exchange-rate

The drying up of private liquidity during crises and constraints on the rapid provision of official liquidity for emergency finance have renewed interest in a more diversified IMS.


flexibility,marketdeterminationofinterestratesandthecommercializationofbanks,aswellaseffectivelyaddressinghighcorporateandlocal-governmentdebt(eichengreen,2011;Yu,2014).21Thus,whilerenmin-biinternationalizationisalongprocess,therecanbelittledoubtthatthecontinuingincreaseintheweightofChinaintheglobaleconomyispushinginthisdirection.22

Given that introducing aglobalcurrencymaybeaprojectfortheverylongterm,andthatthemove towardsamulti-cur-rencysystemmaynotimproveglobalfinancialstability,andinanycaseitwouldbeagradualand time-consumingprocess, theproposal to givetheSDRamoreprominentroleintheiMS,initiallydiscussedinthe1960s,hasreceivednewimpetus.TheideaofreplacingthedollarwiththeSDRastheglobalinternationalcurrencyhasbeenpromoted,inparticular,bytheGovernorofthePeople’sbankofChina(Zhou,2009),byaUnitedNationscommission(UnitedNations,2009)andalsobyanumberofaca-demics(e.g.Kenen,2010a;ocampo,2011and2014).

Similartoadvocatesofamulti-currencysystem,proponentsofanSDR-basedsystemalsoarguethatthiswouldimposeagreaterdegreeofpolicydisci-plineontheUnitedStates,thushelpingtopromoteglobalmacroeconomicstability.DependingonhowSDRswouldbeissued,anSDR-basedsystemwouldalsocurbtheneedforreserveaccumulationforself-insurancepurposes,thushelpingtocutthecostofholdingborrowedreserves,andreduce the current system’sbias in favour of the reserve-currencycountry.Whatismore,an SDR-based systemwouldaddresstheTriffindilemma.itwould delink the provision ofofficial international liquidityfromanynationalissuer,andthecreationofarealalternativetonationalcurrenciesasreserveassetswouldallaytheconcernsofholdersoflargeforeign-exchangereservesaboutmaintainingthepurchasingpoweroftheirreserves.Also,sinceSDRsarebasedonacurrencybasket,23diversifica-tionoutofdollar-denominatedassetswouldentailmuchsmallerexchange-ratefluctuationsthanamovetowardsamulti-currencysystem,therebyminimizingthethreattointernationalfinancialstability.

ontheotherhand,movingtowardsanSDR-based iMS involves several technical and institu-tional challenges, including howSDRswould beissued, how the diversification away fromdollar-denominatedreserveassetswouldbemanaged,andhow the required institutional changeswould be

handled(UnitedNations,2009;ocampo, 2011; anderten andocampo, 2012).24 in order tosupport the sustained expan-sion of international transac-tions,theiMFwouldneedtobeempoweredtoissueSDRsmorefrequently thanunder the cur-rent regularfive-year reviews,wherebySDRsareallocatedto

meetlong-termglobalneedstosupplementexistingreserveassets.MoreregularallocationsaccordingtomemberStates’quotascouldbedone,ascurrently,basedonestimationsofglobaldemandforreserves(iMF,2011a),butmaking themmuch larger25andmorefrequent,orbyallocatingtodevelopingcoun-triesalargersharethantheirquotas.26Moreover,toavoidusingSDRallocationsasasubstituteforneed-edadjustmentwhileensuringtheavailabilityofoffi-cialliquidityasaformofemergencyfinanceintimesofcrisis,theiMFcouldbeempoweredtoissueSDRsinacountercyclicalway,suchasbyincreasingallo-cationsattimesofglobalfinancialstressandpartlywithdrawingsuchallocationsoncefinancialcondi-tionsnormalize.27However,giventhatthedemandforofficialliquidityforcrisis-relatedemergencyfinancemainlyemanatesfromdevelopingcountriesandthattheiMF’squotasystemisheavilyskewedinfavourof

developedcountries,thiswouldrequireasubstantialrevisionofquotas.inthelightofcontinuingdelaysintheimplementationofthequotareformin2010,whichawaitsratificationbytheUnitedStatesCongress,thisisunlikelytohappeninthenearfuture.28

To further reduce exchange-rate volatilitythatmightoccurbymovingoutofofficialdollar-denominatedreserveassetsintoSDR-denominatedreserves, the diversification could bemanagedthroughaso-called“substitutionaccount”,assug-gestedinthedebateoniMSreformduringthe1970s.ThiswouldbeundertheauspicesoftheiMFandusedbymemberStates’centralbanksandgovernmentstodepositsomeoralloftheirdollarreserves,obtaining

A greater international role of the renminbi is a logical corollary to China’s growing global economic weight in the long run.

Despite all its deficiencies, the dollar standard is likely to remain for the foreseeable future.


inexchangeclaimsdenominatedinSDRs.29Movingtowards an SDR-based iMSwould also involveeliminating theFund’s distinctionbetween its so-calledgeneralresources,whichhavebeenbasedonmemberStates’ national currencies, and theSDRaccounts.SinceanySDRrepresentsapotentialclaimonsomecurrency,anSDRmustbeunderwrittenbythecentralbanksthatissuethecurrenciesincludedinthebasketthatmakeuptheSDR.However,noneoftheunderwritingcentralbankscandeterminethecurrencyonwhichtheSDRholder’sclaimwillbeexercised.Thislossofcontrolovermoneycreationcouldwellbedifficultforanycentralbanktoaccept.

enlarging the international roleofSDRsandchangingtherulesfortheirissuancetomeetmoreflexibly theeconomicneedsofmembercountries,insteadofreflectingtheexistingquotas,wouldbeamajorreform.inthelightofcontinuingdelaysintheimplementationofacomparativelymarginaladjust-ment,suchasquotaredistribution,movingtowardsanSDR-basedsystemposeseconomicandpoliticalchallengesthatmaymakeitdifficulttoimplement.

2. Reforming the dollar standard

betweentheearly1990sandtheearly2000s,anumberofdevelopingcountriesexperiencedboom-bustcyclesofprivateinternationalcapitalflowsthatprecipitatedaseriesofbalance-of-paymentscrisesinthesecountries,asdiscussedinchapterii.TheAsianfinancialcrisisin1997–1998,inparticular,triggeredadebateonwhatsystemofglobalgovernancewascompatiblewithflexibleexchangeratesandlarge-scaleprivatecapitalflows,andwhat role the iMFshouldplayinsuchasystem(TDR 2001).Giventhatproposalsdesignedtoregulateandstabilizeinterna-tionalcapitalflowsweresummarilydismissedfromtheoutset, theoutcomeof thisdebateemphasizednationalpolicymeasuresthatprovidedself-defencemechanismscombinedwiththecreationofprecau-tionary“pre-crisis”lendingfacilitiesattheiMF.

Sincecapitalflowslargelyrespondtoconditionsindeveloped-countrymarkets,effectiveself-defencemechanisms in developing countries havemainlyfocused on the accumulation of foreign-exchangereserves.The new approach to iMF lendingwasdesignedtoreducethevulnerabilityofmembersto

thecontagioneffectsfromcapitalaccountcrisesinothercountriesthroughostensibly“soundpolicies”.The iMFmadeavailablepre-committedcredits tocountriesmeetingpre-establishedeligibilitycriteriatobridgeany liquidityshortage thatmight remainevenafterusingacountry’sreserves.ThiswasontheconditionthatpotentialrecipientsofsuchiMFfinancingwouldcommittomaintainingpoliciesthatprivatecapitalmarketswouldinterpretasacredibledefence against a crisis of confidence.However,thecreationofnewloanfacilitiesfor thispurposehashadonlyverylimitedsuccess.Forexample,theContingentCreditline(CCl)createdbytheiMFin1999remainedunuseduntilitwassuspendedinNovember2003,becausepotentialusersfearedthatrequestingaCCl loancould signal an impendingdifficultythatmarketparticipantshadnotdetected,andmight therefore cause private capital inflowsto bewithdrawn rather than increased. Similarlythe Flexible Credit line (FCl) adopted by theiMFin2009hasbeenusedbyonlythreecountries(Colombia,MexicoandPoland),despitelessstrin-genteligibilityrequirements.Anadditionalfacility,thePrecautionary andliquidityline (Pll),wascreated for countries that have soundpolicies butare ineligible for theFClbecause of certain vul-nerabilities – but only two countries (the formerYugoslavRepublic ofMacedonia andMorocco)haveusedit(iMF,2015cand2015d).30Asaresult,otherinstrumentshaveemergedfortheprovisionofofficialliquidityduringtimesofmarketstress,suchascurrencyswaparrangements.

(a) Central bank foreign-currency swap arrangements

Central bank foreign currency swap arrange-ments have begun to play a crucial role in theprovisionofemergencyliquidity.WhentheimplosionoftheUnitedStatesfinancialmarketseventuallyledtotheglobalfinancialcrisisin2007–2008,interbankfundingbegandryingupbeyondUnitedStatesfinan-cialmarkets,andcreatedanacuteglobalshortageofdollarliquidity.31TheUnitedStatesFederalReservecoulduseitsordinaryfacilitiestoprovideliquiditytoUnitedStatesbanks,butcouldnotdosoforthemultinationalbanks,manyofwhicharebasedinotherdevelopedcountries,andwhich,priortothecrisis,had relied on cheap dollar funding through theiroperationsintheUnitedStates.Thus,inDecember2007 theUnited States Federal Reserve started


to engage in currency swap arrangementswith anumberof foreigncentralbanks. inasense, thesearrangementsweretheinternationalextensionsoftheunconventionaldomesticmonetarypolicymeasuresthatmanymajorcentralbanksadoptedatthetime,withthecrucialdifferencethattheinternationalswaparrange-ments were undertaken in acoordinatedway.

Centralbankcurrencyswapsarearrangementsbetween twoormorecentralbankstoenablea central bank in one countrytoprovideforeign-currencyliquiditytobanksinitsjurisdictionintheeventofasuddenshortageofsuchliquidity.Given thedominant roleof thedollar inglobalinterbankmarkets,andthefactthatmostlocalforeign-currencyloansaredenominatedindollars,theUnitedStatesFederalReservehasbeenoneofthepartiesinvolvedinmanyofthesearrangements.

Addressingtheseliquidityproblemsbyusingforeign currency swap arrangements andmakingtheUnitedStatesFederalReservethedefactointer-national lender of last resort relied on threemainpremises.First,centralbankscanactswiftly;second,theyfacevirtuallynolimitontheirmoney-creatingcapacities;andthird,theprovisionofinternationalliquiditythroughswaparrangementswiththecentralbankthatissuesthecurrencyinwhichtheliquidityshortageoccursdoesnot cause any exchange-rateeffects. if, on the other hand,foreigncentralbankssell theirowncurrenciestobuy,forexam-pledollarsonthespotmarket,the requiredmassive scale ofthetransactionwillexertstrongdownwardpressureontheircur-rencies.Thiswill complicate,ratherthanfacilitate,thesecur-ingoftherequiredfundingfortheircommercialbanks,aswellascreatingupwardpressureonthedollar,whichmaydestabilizeUnitedStatesfinancialmarkets.

Moreover,manycentralbanks,includingthosefromdevelopingcountriesthathadaccumulatedsub-stantialreserves,werereluctanttousealargeamountof their dollar-denominated assets tomeet dollarliquidityproblems.Theywereconcernedthattheirreserveswouldproveinsufficienttoresolveliquidity

problems if theystarted toexperiencecapitalout-flows,andthatusingtoomuchoftheirreserveswouldinsteadfuelmarketuncertaintyandaccentuate thedollarshortage.indeed,accordingtosomeestimates,thedollarreservesofmanycentralbanksattheonset

oftheglobalfinancialcrisisweresmaller than the amounts theysubsequentlyborrowedthroughthe swap arrangements.Thustheir reservesalonewouldnothavebeen sufficient to reducefunding pressure on financialinstitutions and improve thefunctioning of interbank lend-

ingandcreditmarketsduringtimesofmarketstress(obstfeldetal.,2009).32Moreover,theUnitedStatesFederalReservewasconsciousofthefactthatamas-sivesellingofTreasurysecuritiesbyforeigncentralbankswaslikelytoaddtofinancialturmoilinUnitedStatesfinancialmarkets.

According to someobservers (e.g.Allen andMoessner, 2010;bordo et al., 2014), the counter-parts involved in these swap arrangements (mostnotablytheeCb)werechosenbecauseoftheirsizeandthepotentialspillovereffectsthatseriousbank-ingcrisesintheirjurisdictionscouldhaveonglobalfinancialmarkets.33Fromthisperspective,theswaplinesextendedbytheUnitedStatesFederalReserverepresentacaseofsuccessfulcooperationbetweencentralbanksinaddressingglobalconcerns.others(e.g.AizenmanandPasricha,2010;Prasad,2013),on

theotherhand,arguethatcoop-erationmerely stemmed fromcoinciding interests under thespecialcircumstancesthatpre-vailedatthetime,andthatthechosen countries had bankingsystemswith a sizeable stockofliabilitiesowedtotheUnitedStates’bankingsystem,aswellasagoodsovereigncredithis-

tory.ThismightbetakentomeanthatextendingtheswaparrangementswasintheinterestoftheUnitedStates,andservedsimplytocontrolasituationthatmayhave posed a systemic risk to that country’sbankingsystem.

ThePeople’sbankofChina(PboC)didnotrequestaswaparrangementwiththeUnitedStatesFederalReserve because it had access to a verysubstantialamountofdollar reserves,whichsome

Central bank foreign currency swaps now play a crucial role in providing emergency liquidity …

… but swap arrangements extended by developed-country central banks mainly cater to developed-country needs.


estimatetohavetotalled$3.8trillion,orroughlyonethirdoftheworld’stotal,inApril2014(Aizenmanetal.,2015).Moreover,Chinesebanksarefundedmainlyfromdomesticsources,withfewinternationaloperations thatwould require dollar-denominatedliquidity.

instead,thePboCitselfestablishedcurrencyswaparrangementswithawiderangeofothercentralbanks,mostlyfromdevelopingcountries.34but it is generallybelievedthatthemainobjectiveof these arrangements has notbeentoaddresstheproblemofliquidityshortages,butrathertofostertheinternationalizationoftherenminbibyincreasingtheshareofChina’stradeinvoicedandsettledinrenminbi(PboC,2012:68),perhapswithaviewtoerodingthenet-workexternalitiesthathavehelpedmaintainthedol-lar’spredominantroleasaninternationalinvoicingandsettlementcurrency.35Theselongertermobjec-tivesof thecurrencyswaparrangementsextendedbythePboCarealsoreflectedintheirdurationofthreeyearswiththepossibilityofrenewal,aswellastheirdenominationinrenminbiwhichdiffers,forexample,fromthePboC’sswaparrangementsundertheChiangMaiinitiativeMultilateralizationthataredenominatedindollarsandservetostrengthenthedefencesofmemberStatesduringfinancialcrises,asdiscussedbelow.

ofparticularinterestinthecontextofthischap-termaybethePboC’scurrencyswaparrangementwithArgentinasignedinJuly2014,whichenablesArgentina’scentralbanktoexchangetherenminbiitreceives(againstArgentinepesos)throughtheswapinto other currencies, includ-ing dollars, if necessary.ThisamountstoaddingrenminbitoArgentina’s foreign-exchangereservesasiftheyweredollars.These “vouchers” for dollarsthus free upArgentina’s actu-al foreign-exchange reservesfor its immediateneeds.36 inasense,thisswaparrangementenablesArgentinatotapintoChina’sverysizeabledollarreservesforitsownforeignexchangeliquidityrequirements.Whilethesearrangementsmayclosely resemble foreign-currencyloans,theynonethelesscanhelpdealwith

episodesofcapitalflowvolatilityandstabilizetheforeignexchangemarketintimesofstress.37

othercurrencyswapnetworkshavesprungupinvolving thecentralbankofamajoreconomy inaspecificregionandanumberofcentralbanksinsmallerneighbouringcountries.Forinstance,someeuropean countries that are notmembers of theeuroarea(suchasDenmark,Hungary,Polandand

Sweden)which suffered fromeuro liquidity shortages bene-fited from swap arrangementswiththeeCb,whiletheSwissNationalbank extended swaparrangements to theeCb andtothecentralbanksofHungaryand Poland thatwere suffer-ingfromliquidityshortagesinSwiss francs. inAsia, China

andJapanestablishedarrangementswithindonesiaandtheRepublicofKorea,aswellaswithanum-berofothercountries.Whatismore,theseregion-alnetworkshavebeenusednotonlyforregionallydominantcentralbankstoprovideliquidityintheircurrencies,butalsotoredistributedollarstocentralbanksthatcouldnotgetdirectaccesstodollarliquid-ity through theUnitedStatesFederalReserve.AnexampleistheswaparrangementbetweenthebankofJapanandtheReservebankofindia.38butsuchswaplineshavebeenmuchsmallerinsizeandulti-matelytemporary,andatpresenttheydonotofferadequateemergencyfinancetothosecountriesthatarelikelytoneeditthemost.

AlloftheswaplinesestablishedbytheUnitedStates FederalReserve in 2007–2008 expired, asscheduled,inFebruary2010.butthearrangementswithfivecentralbanks(i.e.thebankofCanada,the

bankofengland, thebankofJapan, theeCband theSwissNationalbank)weremadeper-manentinoctober2013.Giventhat these central banks estab-lishedtemporaryswaparrange-mentswitheachotherin2011,when the euro crisis began tothreatenthefunctioningofglob-

alfinancialmarkets,lenderscouldaccessemergen-cyliquidityinthesesixinternationalcurrencies.Asaresult,centralbankswaparrangementshavenowbecomepartoftheiMS,andfinancethebulkoflend-er-of-last-resortliquidityprovisionsofforeigncentral

The lack of decisive reform continues to encourage developing countries to accumulate more reserves …

… but this implies serious risks for those countries themselves and for the global economy.


banks,whiletheUnitedStatesFederalReservehasbecomethedefactointernationallenderoflastresort.

A systemic question related to central bankcurrency swaps concerns their relationshipwiththe existing internationalmonetary and financialarrangements. Since swaps can potentially cre-ate unlimited amounts of international liquidity, acomprehensivenetworkthatgivesautomaticaccesstoofficial international liquiditycouldobviate theneedforself-insuranceintheformoflargeforeign-exchangeholdings.However,thusfar,currencyswaparrangements have been limited to countries thathave a clearly perceived self-interest inmaintain-ing access to liquidity in the partner country, andtherefore a permanent institutional framework forsuchswapsisunlikelytoemerge.indeed,sincethehighdegreeofflexibilityanddiscretionthatallowrapidliquidityprovisionatrelativelylowtransaction

costsarethekeycharacteristicsofcentralbankswaparrangements,theirverylogicpreventsbroaderinsti-tutionalization(Destais,2014;Sgard,2015).

Anadditionalsystemicquestioniswhethercen-tralbankcurrencyswapshavereducedthedesireofdevelopingcountriestoaccumulatelargestockpilesofforeign-exchangereserves.Totheextentthatswaplinesarerapidlyavailableattimesofmarketstress,central banks can reduce other liquidity buffers,includingtheirreserveholdings.ontheotherhand,large reserve stocksmay be required to reduce alendingcentralbank’ssovereigncreditriskandmakeswaplinesaccessible.Andonlythecombinationofsecureswaplinesandlargereservesmaycontributeto crisispreventionby instillingconfidence in thefinancialmarkets of a country’s liquidity and sol-vency.Moreover,foreign-currency-denominateddebthasincreasinglybeenaccumulatedbynon-financialactors,suchascorporationsandhouseholds,andcen-tralbanksmaybelegallypreventedfromextendingtheborrowedforeigncurrencytothem.Perhapsmostimportantly,evidencesuggeststhat,despitetheaccu-mulationofsignificantforeign-exchangereservesbysomedevelopingcountries,inmostcountriesthesearestillmodestcomparedwiththeincreaseintheirexternalliabilities,andtoomodesttoeffectivelyavertthreatstofinancialinstability(chart3.2).Allofthis,andespeciallythefearofexclusion,willcontinuetoencouragecountriestoaccumulatemorereserves.

(b) Addressing the contractionary bias of asymmetric adjustment

Todate,insufficienteffortshavebeenmadetoeffectivelyaddresstheiMS’contractionarybiasbymakingsurpluscountriescontribute(more)toglobaladjustment, rather than leavingvirtually theentireburdenofadjustmenttodeficitcountries.39

Nevertheless,anumberofconcreteideashavebeenproposed as to howcountrieswith a currentaccount surplus could bemade to adjust.Theseproposals envisage such adjustment taking placeeither in an automatic or coordinatedmanner, butalwaysensuringthatglobaladjustment iscompat-iblewithmaintainingglobal aggregatedemand ata level sufficient to provide full employment andsupport the national development strategies ofdevelopingcountries.Forexample,countriesmightinterveneincurrencymarkets, limitor taxsurplus

Chart 3.2

CROSS-BORDER lIABIlITIES AND FOREIgN-ExCHANgE RESERvES

OF SELECTED DEVELOPING COuNTRIES, 2005–2013

(Billions of current dollars)

Source: UNCTAD secretariat calculations, based on IMF, International Financial Statistics database.

Note: The country sample on which the reported data are based comprises: Argentina, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Egypt, El Salvador, Guatemala, India, Indonesia, Jamaica, Jordan, Malaysia, Mexico, Morocco, Pakistan, Panama, Peru, the Republic of Korea, South Africa, Thailand, Tunisia, Turkey, Uruguay and the Bolivarian Republic of Venezuela.

0

1 000

2 000

3 000

4 000

5 000

6 000

7 000

8 000

9 000

10 000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Total non-gold reservesInternational investment position: liabilities


countries’ holdings of foreign assets (particularlyTreasurysecurities), symmetrically limit the shareinGDPof countries’ current account surpluses ordeficits, or receive authorization from theWorldTradeorganization (WTo) toimposetariffsorotherformsoftraderetaliationonexportsfromsurpluscountries(forareview,seeWilliamson,2011).buttherearearangeofunresolvedques-tions:whowoulddeterminethatacountry’ssurplussituationisunacceptable,whatwouldtriggeraction,howwoulditbedeterminedthattheactionisproportionateand,perhapsmostimportantly,whatwouldinducepower-fulsurplusnationstoagree?

The iMS’ contractionary bias could also beaddressed throughmore appropriate iMF surveil-lancethroughitsArticleiVconsultations.However,itiswellknownthattheiMFexertsitssurveillancefunctioninanasymmetricway,asitcanmeaning-fullyinfluencenationalpoliciesonlywhenacountryformallyrequestsfinancialsupportandthusbecomessubjecttoiMFconditionality.Thus,iMFdirectivesonlyaffectdeficitcountriesbuthavelittleleverageoversurpluscountries.Moreover,globalsurveillanceprocedureshavefailedtopreventcurrencyturmoiland several international financial crises, particu-larlytheglobalcrisisthatbeganin2008.TheiMF’sinabilitytoforestallfinancialcrisesandtodealwiththem,oncetheyoccur,hasoftenbeenduetoitsinap-propriateassessmentoftheunderlyingcauses.Thisispartlyattributabletoitsasymmetricsurveillance.TheiMFconsidersitnecessarytofocusitssurveil-lancemoreonriskspreadingandspillovers,aswellasonlinkagesbetweenfinancialandmacroeconomicforces. it alsoconsiders it important to streamlineitsmultilateral surveillancemessages, such as bydeliveringmorecandidandpracticaladvicetosys-temically importanteconomies,andremovinganydoubtsabouttheinstitution’seven-handedness(iMF,2014).Whiletheseareworthyintentions,thereisnoindicationthatitwillgobeyondthetraditional“nam-ingandshaming”ofsurpluscountries.40

effective international policy coordinationwouldbetheoptimalwaytoaddresstheiMS’con-tractionarybias,butthisappearstobeverydifficulttoimplement.ThelimitedsuccessoftheG-7,andlater theG-20, in this regard, aswell asmuchoftheinitialcausesandpersistenceoftheeurocrisis,

maybepartlyattributedtodivergingviewsamongpolicymakers as to the correct approach to adoptfortacklingthecrisis.Theyalsodifferontheextent(andsometimeseventhedirection)oftheimpactof

policies, especiallyfiscal poli-cies (TDRs 2010, 2012).Withsuchdisagreement,decisionsontheappropriatenatureofpolicycoordination andmonitoringmechanismsbecomemoredif-ficult.However,itisevidentthattheabsenceofsuchcoordination

intensifiesthecontractionarypressuresafflictingtheglobaleconomy.

Tosumup,thestepstakenbytheinternationalcommunitytoreformtheiMShavebeeninsufficientforaddressingtheshortcomingsofthecurrentdollarstandard.of specificconcern todevelopingcoun-tries is that theprovisionof international liquidityremains subject to the boom-bust cycles of short-term private international capital flows, and thatcentral bank foreign currency swap arrangementsarenoteffectivedisincentivestotheaccumulationofforeign-exchangereservesforprecautionarypur-poses.Moreover,theshortcomingsofinternationalpolicycoordinationhavefailedtoaddresstheprob-lemofanunequalsharingoftheburdenofadjustmentamongdeficitandsurpluscountries.

3. Strengthening regional and interregional cooperation

Since comprehensive reform of the iMS isnot on the immediate agenda, and themeasurestakenbytheinternationalcommunitytoaddresstheshortcomingsofthecurrentdollarstandardremainunsatisfactory,developingcountriesneedtoconsiderwhattheycoulddoforthemselves.oneimportantstrategywhichindividualcountriescouldconsiderpursuing is to use capital accountmanagement asa regular instrument forpreventing theboom-bustcyclesof international capitalflows fromexertingpressureonexchangeratesanddestabilizingfinancialmarkets(TDR 2014).

There are alsoways of dealingwith somespecific concerns through bilateral, regional andother group-based arrangements that provide

Implementing effective inter-national policy coordination has proved difficult.


some additional access to liquidity both in gen-eralandalsoasemergencyfinancewhenrequired.Recentdevelopmentsinregionalandinterregionalmonetary arrangements havefocusedincreasinglyonalleviat-ingadverseimpactsofexternalfinancialshockswithaviewtosecuringmacroeconomic andfinancial stabilitywithin thegroup.This can be done in anumber ofways: establishingpaymentssystemsthatdampenthe volatility of cross-borderprivate capital flows and pro-moteintra-grouptradewithoutusingthedollar,reservepoolingthatmakesavailableshort-termfinancetofacilitateexternaladjustment,andexchange-ratepolicycoordinationthatpreventsthe accumulation of intraregional imbalances orfacilitatestheiradjustment.41

Regional payment systemswhich reduce thenumberandvalueoftransactionsthatneedtobecar-riedoutinforeigncurrenciesareonewaytomitigateexchangerateuncertaintyandrisk.Theycanalsohelptopromoteinterregionaltradebycuttingthetransac-tioncoststhroughtheuseofdomesticcurrenciesinsuchtraderatherthanhavingtochangecurrencies(often several times)against a third, international,currency.

Amongdeveloping countries,latinAmericahas pioneered the implementation of such pay-mentmechanisms.42 in 1965, thelatinAmericanintegrationAssociation (lAiA) established the“reciprocal credit and pay-mentagreement”(CPCR−theacronymforitsSpanishname)among themember countries’centralbanks.ithasfunctionedasaclearinghouseandashort-termcreditmechanismfortradetransactions,which includes aclearanceperiodoffourmonths(with central banks assumingtheriskofdelayedpayments)andnetsettlementindollars thereafter. itwas used a great deal duringthe1970sand1980sat timeswhenaccess todol-lar financingwas extremely difficult.At its peak,during thelatinAmericandebtcrisis,80percentof intraregional tradewas channelled through thisarrangement.However, changes in international

financial conditions in the early 1990smeant thatitwasmorebeneficialtoprepayimports,effective-lydiscouragingtheuseof thisfacility.Thispartly

explainsthesubsequentmarkeddeclineinthevolumeoftransac-tionssettledthroughthelAiA,whichfelltobarely5percentofintraregional trade (UNCTAD,2011).Similarly,in1969CentralAmerican countries foundedtheCentralAmericanMonetaryStabilizationFund in order tofinance balance-of-paymentsimbalances, but its operationswere suspended in the mid-

1980s followingwidespread payment difficultiesbytheparticipatingcentralbanks(seeTDR 2007).

Variousgroupsof countrieshave instituted anumber of innovative payment systems since the2008 crisis years.one of the simplest, thelocalCurrencyPayment System (Sistema dePagos enMonedaslocales,SMl),wasestablishedbetweenArgentinaandbrazilin2008forbilateraltrade.itenablestransactionsbetweenexportersandimport-ersinthetwocountriesinlocalcurrencieswithouttheintermediationofthedollar,aswouldotherwisehavebeentheusualpractice.TheSMlisparticu-larlyusefulforsmallandmedium-sizedenterprises,asitobviatestheirneedtoaccessforeignexchangemarkets,which added significantly to their costsbecausetheirlowvolumeoftransactionsistypicallyassociatedwithhigherperunitcosts.initially,onlyasmallnumberoftransactionstookplacewithalowtotalvalue,butusepickedupquickly,andby2013

almost10,000brazilianexportoperations(Argentineimports)had been carried out throughSMl.Argentine exporters tobrazilhavenotbeenusingthesystemtothesameextent,partlybecauseofthearbitragebenefitstothemofretainingincomeindollars.Thesystemaccountsforonly3percentoftotalbilateral

trade,butstillclearlybenefitssmallerfirms,almostthreequarters ofwhich reportedusing the systemmultiple times.Uruguayhas recently signedSMlagreementswithbrazil(in2014)andArgentina(in2015),creatingthebasisforamultilateralsystemthatcouldbejoinedbytheothercountriesoftheCommonMarketoftheSouth(Mercosur).

Since comprehensive reforms are not on the immediate agenda and the measures taken by the international community remain unsatisfactory …

… developing countries need to consider what they could do for themselves at the regional level.


Amore complexmechanism established in2010 is the Unitary System of local PaymentsCompensation (SistemaUnitariodeCompensaciónRegional, SUCRe),which is based on a “virtual”regionalcurrency.43Thecountriesparticipatinginthisarrangementarebolivia(PlurinationalStateof),Cuba,ecuador,Nicaragua,Uruguay and thebolivarianRepublicofVenezuela.liketheSMl,SUCReaimstoavoidtheuseofthethird-partycurrency,thedollar,fortransactionswithintheregion.italsoenablesdelayedsettlements of payments (unlikeSMlwhere trans-actionsaremostlysettledwithin24hours).itsusehasincreasedrapidly:withinfouryearsofitsinceptionitaccountedforaround24percentof total intra-grouptransactions (PerezCaldenteyet al., 2014). like the SMl,membersoftheSUCReusethemechanismtovaryingdegrees,reflecting their different economic structures andsize.ThebolivarianRepublicofVenezuelahasusedthesystemthemost,withtheSUCReaccountingfor93percentofitstotalintraregionalimportsin2012.incontrast,ecuadorhasuseditforonly7percentoftransactionsandCubaforabout10percentofexports.

easing electronic payments and creating amoremodern systemof interregional transactionswastheaimofanotherpaymentmechanisminlatinAmericaknownastheregionalinterlinkedpaymentsystemor“SistemadeinterconexióndePagos”(SiP).introducedbeforetheeconomicandfinancialcrisis,thismechanismbeganwithelSalvador(2007)andthengainedadditionalmembersasthecrisisunfolded,includingGuatemala, Honduras, Nicaragua, theDominicanRepublicandCostaRica.ThismechanismisbroaderthantheSMlandSUCRe,andcomprisesallkindsoftransactionsapartfromthoseinvolvingtrade,includingremittances.itaimstoofferacheap,rapidandsafeplatformfortransfersandsettlementsbetweenfirms,financialinstitutionsandcentralbanksofmembercountries.Alloperationsarecentralizedthroughoneinstitutionaladministrator(currentlytheDominicanRepublic),whichisresponsibleforrealtimegrosssettlementofpositions.Asaresult,itisestimatedthatthecostofregionaltradetransactionshasfallensignificantly(PerezCaldenteyetal.,2014;FritzandMühlich,2014).

Regionalmechanismsarealsoemergingtohelpmeetdevelopingcountries’medium-andshort-term

needsforinternationalcapital,thuspotentiallycon-tributingtostrengtheningtheirresiliencetoexternalshocks.Providingcountercyclicalfinancehaslongbeen recognized as one of the critical pillars ofregionalfinancialcooperationandintegration.

AnexampleofsuchamechanismistheChiangMai initiative (CMi) launched by theASeAN+3economies44inMay2000.itisasystemofbilater-al swap arrangements designed to provide liquid-ity support tomembers experiencing short-term

balance-of-paymentsproblems.The CMi has been replacedby theChiangMai initiativeMultilateralization (CMiM),whichisamultilateralreserve-poolingandswaparrangement.TheCMiMbecameeffectiveinMarch2010withaninitialsizeof$120billion,whichwasdou-

bledto$240billionin2012.itisdesignedtosup-plementtheexistinginternationalfinancialarrange-mentsforaddressingbalance-of-paymentsandshort-term liquidity difficulties in the region.There arealso plans to create aCMiMPrecautionaryline,whichwilloperateinparallelwiththeCMiMmech-anism,nowrenamedtheStabilityFacility.45inaddi-tion,anASeAN+3MacroeconomicResearchoffice(AMRo)wasestablishedinApril2011asaninde-pendentregionalsurveillanceunitthatanalysesandmonitorstheregionaleconomiesandsupportsCMiMdecision-making.46

However, neither the CMi nor the CMiMhaveemergedasmajoralternatives to the iMFordeveloped-country sources for helping to resolvemembers’ balance-of-payments problems. indeed,theywerenotusedatallduringthe2008–2009crisis,andhavebeenonlyrarelyusedsincethen.Tobeginwith,theamountofdollarliquiditythatcanbedrawnfromtheCMiMappearstobetoosmalltoconstituteacredibledefenceagainstreversalsofinternationalcapitalflows.Moresignificantly,amemberthatseekstodrawmorethanacertainshareofthemaximumswap amount that it can obtainmust have a loanagreementwiththeiMFandsubmittoiMFcondi-tionality.47However,oncetheCMiMPrecautionarylineandregionalsurveillancebytheMacroeconomicResearchofficebecomefullyoperational,thelinkwithiMFconditionalitycouldbereduced,makingthesefundsmoreattractive.butthenitisimportanttoensurethatthearrangementdoesnotattachsimilar

Developing countries could proactively build on existing regional and interregional monetary arrangements.


conditionalitiestoitsloansasthoseimposedbytheiMF,whichcoulddetercountriesfromusingit.

establishingswaparrangementsbetweenregion-almonetaryinstitutionsandacentralbankissuinganinternationalcurrencycouldsignificantlyincreasetheamountofliquiditysupportavailabletomembersofregionalarrangements.48 in theASeANregion, theCMiMwouldbewellsuitedtotakeonthisroleasitsmembersincludebothChinaandJapan,whichhavealreadyparticipated in bilateral swap arrangementswith countries in the region.Suchlinkedswaparrangementswould,inprinciple,needtopro-videaccesstounlimitedamountsofliquiditytobefullyeffective.ithasbeensuggestedthatrelat-edmoral hazard issues couldberesolvedbyassociatingsuchaccesswiththeprequalificationprocessof the iMF’sFClandPll facilities.Thus, prequali-fiedcountrieswouldaccesstheiMFfacilitiesasafirstlineofdefence,andsubsequentlytheywouldhaveaccesstounlimitedswapsshouldamassiveliquiditywithdrawaloccur(ParkandWyplosz,2014).WhilethisproposalraisesmanyconcernsassociatedwithiMFlending,asmentionedearlier,itdeservesfur-therdebate,especiallyifappropriatereformofiMFgovernanceandsurveillanceisundertaken.

latinAmericahasalongerhistoryofregionalarrangementsinvolvingmutualcreditsupportamongcountries.ThelatinAmericanReserve Fund (orFlAR−theacronymforitsSpanishname)estab-lished in 1978 is a liquidity-sharingmechanismbetweenmediumand small-sizedmembers (FritzandMühlich,2014).itslendingvolumedependsonthepaid-incapitalofitsmembersandonthetypeofcredit−whetheritistofinancebalanceofpayments,liquidityshortages,orothertypesofcontingencies−withanupperlimitoftwoandahalftimesthepaid-incapitalforbalance-of-paymentsproblems.However,itsdisbursementcapacity is relativelysmall,sinceit has a paid-in capital of only $3.6 billion,withindividual contributions ranging from $328 to$656million.Nevertheless,thevotingmechanismsfordecision-makinghavecreatedasenseofowner-shipamongitsmembercountries.49Thisisreflectedinitspositionasafavouredcreditorandazerodefaultratewithahighercreditratingthanthatoftheindi-vidualcountriesthemselves,eveninthecontextof

sovereigndefaults.ithasarecordofspeedyresponsestoloanrequests,withnoconditionalityattachedtoitsassistance.largermembercountriesstilltendtoviewitasacomplementarymechanismtootherliquidity-sharingarrangementssuchasiMFsupport,butsomecountriessuchasecuadorhaveborrowedmorefromFlARthanfromtheiMF(FritzandMühlich,2014:10).Prospectsfor itsenlargement to includeothermajorregionalplayerssuchasArgentina,brazilandMexicogiverisetoconcernsrelatedtoitsvotingandsurveillancemechanism(seeTitelmanetal.,2014),

similartothemoralhazardcon-cernswithrespecttotheCMiM,asmentionedearlier.

Similarly to FlAR, theArabMonetary Fund (AMF)providesemergencybalance-of-paymentsfinancingthattailorsits lending conditions to eachbeneficiary’ssituation.Thecon-ditionsaregenerallylessstrict

thanthoseoftheiMF.TheAMFstartedoperationsin 1977with 22WestAsian andAfrican coun-tries.Giventhatitstotalsubscribedcapitalisabout$1.8billion,whichisevensmallerthanthatofFlAR,itusuallycomplementsiMFloans(forfurtherdiscus-sion,seeTDR 2007;andFritzandMühlich,2014).

one recent proposal goes a step further andbuilds onKeynes’ idea of establishing a clearinghousethatwouldfacilitatetradeandotherinterna-tionalpaymentsusingdebitsandcreditsdenominatedinanotionalunitofaccount(Kregel,2015).50Theunitofaccountwouldhavefixedconversionratestonationalcurrenciesbutmaynotbe traded.Creditswiththeclearinghousecouldbeusedonlytooffsetdebitsbybuyingimports.Countrieswithacurrentaccount surpluswouldhavean incentive to spendtheircreditsasthesewouldlapseifnotusedwithina specified period of time.This provisionwouldbothhelpsupportglobaldemandandleadtoamoreequitablesharingoftheburdenofadjustment.51inparticular,thetaxorinterestchargesoncreditanddebitbalanceswould limitpayment imbalances inasymmetricmanner,andmultilaterallynegotiatedexchange-ratechangeswouldenabletheadjustmentof imbalanceswhentheir limitsarebreached.Thecollectedchargescouldbeusedasadditionalcreditstosupporttheclearingaccountsofdevelopingcoun-tries.As an additional feature, a country’s capitalflowscouldbelimitedbyitscurrentaccountposition

Regional arrangements have suffered from institutional shortcomings and, especially, limited size, which could be overcome by linking them to global facilities.


and capital outflows in the formof foreigndirectinvestmentsorportfolioinvestmentswouldbalanceoutforeigncreditsinthesamewayasimports.Therewouldbenoneedforforeign-exchangereserves,andnotional exchange rateswith the accounting unitcould be adjusted to support development policy.Such clearing houses could be established on aregionalbasis, buildingonexisting swaparrange-ments.Thiswould allowdeveloping countries topursuetheirdevelopmenttrajectorieswithoutrelyingonreformoftheinternationalmonetaryandfinancialarchitecture,particularlyastheirconcernshavenotbeen adequately taken into account indiscussionson reform.As argued byKregel (2015: 21), forthesecountries, “thebasic advantageof theclear-ingunion schemes is that there is noneed for aninternationalreservecurrency,nomarketexchangeratesorexchangeratevolatility,andnoparitytobedefended.”

A problem affecting regional arrangementsis that all theirmembersmaybe subject to exter-nal shocks simultaneously.This problem clearlyunderlines the need for such arrangements to beof a certainminimumsize.links to interregionalswaparrangementswouldbeparticularlyusefulinthisrespect.Anotherpossibilitymightbethecrea-tionofacommonfundwithaperiodicincreaseofpaid-in capital,wherebya regional clearingunionorreservepoolcouldincreaseitsliquidityprovisioncapabilities by borrowing on its own.This couldevenbeaneffectivetoolforpreventingintraregionalcontagionintheeventofexternalshockswithdif-ferentintensitiesorvaryingtimelags.Moreover,ina heterogeneous international community, strongregionalinitiativescancombinewithglobal,regionalandnationalinstitutionstocreateabettergovernancesystemthananarrangementbasedsolelyonglobalfinancialinstitutions.

Theshortcomingsof theiMShavebeen thesubjectof intensedebatefordecades,but thenewglobal economic environment has altered somechallengesandbroughtinnewconcerns.Thechal-lenge of providing an adequate level of interna-tionalliquidity,whichwasattheheartof thedebateon reform-ingtheiMSduringthebrettonWoodsperiod,haslostmuchofits relevance. Private interna-tionalcapitalflowshaveattimescomplemented,butmoreoftendwarfed, official internationalliquidity.Theboom-bustcyclesassociatedwithsomeofthepri-vate flows indicate the needforpayingmuchmoreattentiontothechallengeofensuringapredictableandorderlysupplyofofficialinternationalliquidity,andespeciallyofshort-term

financerequiredtocompensateforsuddenliquidityshortages.

efforts to reform the iMScan take the formof eitherwholesale changes to global arrange-

mentsandagreementsormorepiecemeal and less ambitiousreformsof thedollarstandard.Suchchoicesgenerallyinvolvetrade-offsbetweencomprehen-sivenessandfeasibility,asillus-trated in chart 3.3,where thepre-crisis dollar standardmayserve as a benchmark.52 Thechartpresents the threefunda-mental challenges confronting

an iMSmentioned in the introduction,alongwiththose that feature in themore recent debate. Forexample,thecrisisexposedthetendencyofthedollar

D. Conclusions and policy agenda: Merits and drawbacks of current reform proposals

The evolving global economy poses new challenges to reform aimed at providing stable and secure emergency finance and redressing the IMS’ inequity and contraction-ary bias.


standard to create excessive external imbalances,poseriskstoexchange-ratestabilityandmakecoun-trieshighlyvulnerabletotheboom-and-bustcyclesthat characterize international capital flows,withadditionalchallenges tomonetarypolicy indevel-opingcountries.Thisimpliesalowerrankingofthecurrent,ascomparedwiththepre-crisis,dollarstand-ard,asthecrisishasheightenedtheneedforforeign-exchangeholdings,sharpenedthesystem’sinequitybias,reduceddomesticpolicyspaceandsloweddowneconomicrecovery.

Newmultilateral arrangements are the onlyreformsthatwouldeffectivelyresolvethesystem’sbiases, both in terms of inequity and asymmetry.Thus,sucharrangementsshouldremainthelong-termobjectiveofanycomprehensivereformagenda.butas longaspolicymaking isdominatedbynationalinterestsandthereisnosupranationalinstitutionwitheffectiveenforcementmechanisms,suchasaglobalcentral bank, or aworldfinancial authority, thereislittleprospectforaglobalcurrency.Anddespiteall its evident advantages, effectiveglobalmacro-economic policy cooperation has been observedonly in situationsof acute crises,when countries’national interests coincided and disputes over thecorrecteconomicmodel,aswellasthedirectionand

sizeofpolicyeffectsandtheassociatedmonitoringandcommitmentmechanisms,couldbeovercome.Thistrade-offbetweendesirabilityandfeasibilityisparticularlypronouncedatpresent,when the tran-sition fromweak economic recovery to sustainedglobalgrowthwouldgreatlybenefitfromcoordinatedexpansionarypolicies.

it is also doubtful whether, at the presentjuncture, itwould be possible to implement theinstitutional changes required formoving towardsanSDR-basedsystem.Andwhilemovingtowardsamultipolarmonetary systemmight bebeneficialin terms of amore flexible provision of officialinternationalliquidity,itwouldprobablyposeriskstoexchange-ratestability.Alternativeinternationalcurrenciessuchas theeuroand the renminbimayassumeincreasinglyimportantrolesfortradeinvoic-ingandsettlinginternationaltransactions.However,theirroleasreserveassetsisunlikelytosubstantiallyincreaseintheforeseeablefuture,asthecrisisintheeuroareapersistsandtheinternationalizationoftherenminbiisprovingtobeaprolongedprocess.

The various foreign currency swap arrange-mentscreatedbycentralbanksfromvariouscountriescanofferapotentiallypowerful tool toensure the

Chart 3.3

FEATURES OF ThE CURRENT DOLLAR STANDARD AND ALTERNATIVE REFORM PROPOSALS

Source: UNCTAD secretariat.

Current dollar standard

World currency

Multi-currency system

Global network of central bank foreign currency swap arrangements

Regional monetary integration

SDR

Pre-crisis dollar standard

Supporting(more) symmetric

adjustment

Facilitating recoveryfrom 2008–2009

crisis

Maintaining purchasing power of

foreign-exchange reserves

Supportingexchange-rate

stability

Enabling orderly adjustment to external shocks through predictable and orderly supply of official international liquidity

Efficient provision of official international liquidity through

network effects

Reducing need forforeign-exchange

reserves

Respectingdomestic policy

space

Ease ofimplementation ofreform proposals


predictableandorderlyprovisionofofficialinterna-tionalliquidity.Currently,thegreaterproportionoftheseswapscaterstodeveloped-countryneeds,whilesuchswapsinvolvingdevelopingcountriesarestillrelativelylimited.

As long as attempts to strengthen financialregulation and improve the resilience offinancialsystems remain largely ineffective in addressingglobalrisksandleveragefactorsthatdriveboom-bustcyclesininternationalcapitalflows,anddevelopingcountriescontinuetobediscouragedfromadoptingcapital-accountmanagement policies as ordinarypolicytools,theonlycollectiveinsurancemechanismavailableto them isfinancial assistancefrom the iMF.However, iMFassistance often implies theadoptionofprocyclicalpoliciesduringcrisisperiods,andmanycountries are choosing,moregenerally, to avoid the condi-tionsattachedtoiMF-supportedprogrammes.Hence,involvingthe iMF in iMS reform thatmeets theneedsofdevelopingcountrieswillrequirepriorreformofiMFgovern-ance,policyorientationandsurveillancemechanisms.

Thesedifficultiesinthedesignandimplementa-tionofthevariousreformproposalshavereinforcedtheperceptionthatself-insuranceintheformoflargeforeign-exchangeholdingsisaneffectivestrategyfordevelopingcountriestofosterexchange-ratestabilityandensurethepredictableandorderlyavailabilityofemergencyfinance.However, encouraging devel-oping countries to takeon still larger holdings offoreign-exchangereserveswouldimplyseriousrisks,notonlyforthosecountriesthemselvesbutalsofortheglobaleconomyasawhole.Foreign-exchangereservesthatareaccumulatedthroughborrowingininternationalcreditmarketsoronthebasisofport-foliocapitalinflowscanfurtherincreasecountries’vulnerability to capital flow reversals and globalfinancial instability.Moreover, the costs involvedinholdingreservesborrowedininternationalcreditmarketswill also increase the current system’sinequity.Anotherpossiblesolutionisforthecoun-tries to try and achieve current account surpluses.However,giventhemanyquestionsassociatedwiththepotentialforexport-ledgrowthstrategiesinthepost-crisiseconomicenvironment(TDR 2013),this

optionwouldprobablyinducedevelopingcountriestoaimforexchange-ratedepreciation,whichcouldjeopardize the sustainabilityof their external debtand risk triggering a currencywar.Moreover, theincreaseintheiMS’contractionarybiasassociatedwithwidespread attempts to accumulate foreignexchangereserveswouldhavetheeffectoffurtherholdingbackalreadyweakglobaldemandandeco-nomicrecovery.

Apreferredoptionfordevelopingcountriesmaybetoproactivelybuildonaseriesofregionalandinterregionalinitiativesdesignedtofosterregional

macroeconomic and financialstability, reduce the need forforeign-exchange accumula-tion, and strengthen resilienceand capabilities to dealwithbalance-of-payments crises.While regional arrangementshavesufferedfromsomeinstitu-tionalshortcomings,thegreatestproblemprobablyistheirlimitedsize.Thiscouldbeovercomebyestablishingzonesofmonetarycooperationattheregionallevel,

whichwould include both clearing arrangementsandsystemsofemergencyfinancethatcouldabsorba significant number of such shocks, and therebyreduce the need for self-insurance.An additionalpossibilitycouldbetolinkregionalarrangementstoglobalfacilities,suchastheiMFortocentralbankswaparrangementsthatincludeacentralbankwhichissuesaninternationalcurrency(TDR 2007;AgliettaandCoudert,2014).Sofar,proposalsforcooperationwiththeiMF(e.g.Volz,2012;iMF,2013)havenotincludedanybindingrulesorguidelines,andlittleseemstohavebeenachievedoncoordinationwithextra-regional swap arrangements.Themodalitiesforcoordinationneed tobeclarifiedbeforeanewcrisishitssothattherewillbeareadyresponsewhenneeded,andduplicationandsubstitutionofresourcesfromvarioussourcesareminimized.

Thereformproposalsdiscussedinthischapteraredifficulttoseparatefromthosedesignedtoavoid,oratleastmitigate,instabilityofthefinancialsys-tem.indeed,theproposalsdiscussedinthischapterarecomplementaryto,andshouldnotbeseenasasubstitute for, the equallynecessary reformof theregulatoryandsupervisoryarchitectureofthefinan-cialsystem.Thisisthetopicofthenextchapter.

Involving the IMF in IMS reform that meets the needs of developing countries requires prior reform of IMF governance, policy orientation and surveillance mechanisms.


1 Thenotionof“internationalliquidity”hasevolvedovertime.Traditionally,itreferredtothegoldandforeign-currency assets that a country’s centralbankcouldreadilyaccess.Thisnotion isstill rel-evantforthosecountriesthatdirectlycontroltheirresidents’ international transactions andmanageexchangerates.bycontrast,forcountrieswithfloat-ingexchangerates,andwhereresidentscanfreelyengage in international transactions, internationalliquidityalsoincludesthegoldandforeign-currencyassetsandcreditstowhichtheirresidentshaveaccess.

2 Thepurposeofprovidingshort-termfinance is toprevent countries that faceproblems in accessinginternationalliquidityduringcrisesfromdefaultingontheirforeignobligationsorbeingforcedtoadoptdrastic “adjustment”measures. it is not aimed atmanagingproblemsassociatedwithsovereigndebtissues,which are addressed in chapterV of thisReport.

3 itshouldbenotedthattheissuesofexternalimbal-ances and their adjustment in the context of theiMSarebasedonaconceptofbalance-of-paymentsequilibrium,wherebyacountry’scurrentaccountis,onaverage,balancedovertime.Thisdoesnottakeintoaccountthefactthatdevelopingcountries,andespecially the least developed among them,mayhavecurrentaccountdeficitsforaprotractedperiodof timeasa resultof theirneed to import capitalgoodsandfinanceinvestmentprojects.ideally,therelatedfinancing requirements should bemet bylong-termdevelopmentfinance,whichisthefocusofchapterViofthisReport.

4 indeed,whiletherewereseveralcasesofcurrencydevaluationbydevelopingcountriesoverthisperiodtocompensateforhigherinflationrates,thedevalu-ationof theFrench franc followedby theUnitedKingdom’s pound sterling in the 1960s signifiedgrowingproblemswiththissystemandpresageditseventualdemise.

5 Moreprecisely,countrieswereallowed tochoosetheirexchangeratesystemaslongastheyavoided“currencymanipulation”,eventhoughthenotionofcurrencymanipulationwasneverdefined.

6 indeed,asnotedbythethenGovernorofthebankofitaly:“Thereisnoofficialinstitutioncapableofsupplying the internationalpayments systemwiththeliquidityrequiredforfurtherexpansionoftrade.This functionhas been takenover by the privatebankingsystem,andprimarilyby theU.S.banks,throughoperationscarriedoutbytheirbranchesathomeandabroad”(Carli,1976:8).

7 TheamountofdollarcreditoutsidetheUnitedStatesincreasesto$9trillionifnon-bankfinancialborrow-ersareincluded,suchastheGermanstateagencyKreditanstaltfürWiederaufbauwhichinmid-2014heldadebtof$100billion.

8 ThesenumbersareUNCTADsecretariatcalculationsbasedondatafromtheiMF’sInternational Financial Statisticsdatabase.

9 itshouldbenotedthatreserveadequacydiffersfromtheconceptofanoptimallevelofreserves.Thelatterbalancesthebenefitsfromreserveholdingsintermsofavoidedpotentiallossesinoutputandconsump-tion from sudden liquidity shortages against theopportunitycostsofholdingreserves,suchasimpliedresource transfers to reserve-currency countries.Theresultingoptimallevelisstronglydeterminedby country-specific, and often time-varying, riskattitudes.

10 ThisnewformoftheTriffindilemmaalsoraisesthequestionastotheextenttowhichtheinternationalroleofthedollarcontinuestoconfereconomicben-efitsontheUnitedStates,whichhasbeenamatterofdebate.oneargument is that suchdemand fordollarreservespushesupthevalueofthedollarandtherebyslowsdownoutputandemploymentgrowthintheUnitedStates,especiallyinthecountry’strad-ablesector,andthat italsoaffectsfiscalrevenues(Pettis,2013;Galbraith,2014).However,theUnitedStatescansettleitscurrentaccountandfiscaldeficitsby printingmoney, and is therefore less vulner-abletoforeignshocks,whileothercountriesmustadjusttoitsmacroeconomicpolicies.inaddition,areserve-currencycountryusuallyearnsinvestmentincomebecauseyieldsonitsforeignassetsusuallyexceedthoseonitsforeignliabilities.Accordingto

Notes


GourinchasandRey(2007),thesebenefitsexceed$30billioneachyearfortheUnitedStates.

11 Foracriticalassessmentofthelinkbetweentheroleofthedollarasaninternationalcurrency,thelargecurrentaccountdeficitoftheUnitedStatespriortothecrisis,andthewayinwhichthecrisisunfolded,see,forexample,Pettis,2013;andTDR 2009.

12 Nevertheless, tradefinance is theone areawheretheinternationalizationoftherenminbihasbecomeparticularlyvisible.in2013,itemergedasthesec-ondmost used currency for settling cross-borderpaymentsintrade,attainingashareofalmost9percent(eCb,2014:32).

13 Theeuroisusedinroughlyonethirdofallforeignexchange transactions, down from39per cent in2010,andtheyen’ssharehasoscillatedaround20percent.Theremaindercomprisesabasketofcur-renciesfromdevelopedanddevelopingcountries,thecompositionofwhichisnotfurtherdisaggregatedbythedatasources.itshouldbepointedoutthatthesumofthepercentageshareswillnecessarilyexceed100percentsincemanytransactions involve twocurrencies.

14 However, the cost of holding foreign-exchangereservesneeds tobeweighedagainst thepossiblemacroeconomiccostsresultingfromexchange-rateappreciationthatwouldoccurintheabsenceofcur-rencymarketintervention(seeTDR 2009:124–125).

15 For technical details of these three stages, seeMundell, 2012. For lessons from the experienceswiththeconstructionandfunctioningoftheeuropeanMonetarySystemandtheeuropeanMonetaryUnion,seeTDR 2007.

16 Forsuchaproposal,albeitlimitedtotheeuropeanUnion, Japan and theUnitedStates, seeCooper,2006.

17 Forexample,rules-basedmanagedfloatingtarget-ingastablerealexchangeratemaybedesignedtoimmediatelycompensateforemergingpriceandcostdifferentialsthroughcommensurateadjustmentsofthenominalexchangerate,therebypreventingthebuild-upoflargecurrentaccountimbalances.insuchasetting,interventionsinforeign-exchangemarketswould be of crucial importance for adjusting thenominalexchangerate.Whilemanyofthetechnicalproblemsassociatedwith thisproposalhavebeenaddressed(e.g.bofinger,2011),theconcretetermsforsuchaschemerequirefurtherdiscussion.

18 AccordingtooneaccountofGermany’sandJapan’sstrategies, the Japanese authorities resisted theinternationalizationoftheyenuntilthemid-1970stosafeguardtheircountry’sdevelopmentmodelthatrequiredminimizingspilloversfrominternationaltodomesticfinancialmarkets,andtopreventupwardpressureontheexchangerate(eichengreen,2011:44–45).butfromabout1975onwards,theystartedtofacilitatetheinternationalizationoftheyen(see

alsoMatsukawa,1982).However, the removalofrestrictionsondomesticandinternationalfinancialtransactionsdidnotproducetheexpectedresult,asitledJapanesecorporationstoaccessinternationalbondmarketswhiledomesticbanksreplacedtheircorporateclientswith realestatedevelopers, trig-geringamassiveboomandbustcycleinrealestate.Germanymaintained restrictions on purchases ofmoneymarketinstrumentsbynon-residentsinordertobeabletoaddressinflationfearsbyraisinginterestrateswithouttriggeringappreciationpressure,whichwould have jeopardized the country’s export-ledgrowthmodel(seealsoRieke,1982).

19 China’s policymakers have adopted a gradualapproachtotheinternationalizationoftherenminbi,withaninitialfocusonitsuseasasettlementandinvestmentcurrency,tobefollowedbyitsuseasareserveasset.Aschemelaunchedin2009toencour-ageimportpaymentsinrenminbihasledtoarapidincreaseinrenminbiusefortradesettlementandthecreationofrenminbioffshoremarkets(firstinHongKong(China)andthenSingapore,TaiwanProvinceofChinaandsomeeuropeancountries).Moreover,theintroductionofrenminbiqualifiedforeigninsti-tutionalinvestorshasboosteditsuseasastoreofvalue.Theestablishmentofforeigncurrencyswaparrangements(furtherdiscussedbelow)hasfurtheredthepossibilityofholdingtherenminbiasareservecurrencyincertaincontexts.

20 SeeZhou (2015) for a brief review of both thehistory ofChina’smove towards capital accountconvertibility and the respective reformsplannedtobelaunchedin2015.Zhoualsoarguesthatoneof the lessonsof theglobalfinancialcrisis is thatcapitalaccountconvertibilityshouldnolongermean“fullyandfreelyconvertible”currencies.Rather,itshouldimplyretaininganumberofcapitalaccountmanagementinstruments,suchasmacroprudentialmeasuresthathelpmanageexcessiveforeigndebtintheprivatesectorandsignificantcurrencymis-matches aswell as capital controls on short-termspeculativecapitalflows.

21 SomeobserversarguethatChinamayfacesimilarproblemstothoseencounteredbyJapan:thefailureoftheyentoemergeasaninternationalcurrencyinthe1970sand1980swasduenotonlytothereluc-tanceofJapanesepolicymakerstointernationalizetheyen,butalsotothefactthattheyenhadnotfirstestablisheditselfasaregionalcurrency(Park,2010;lee,2014).

22 Forafurtherdiscussionofthewiderangeofissuesinvolved in internationalizing the renminbi, see,forexample,theJournal of Chinese Economic and Business Studies,May2013–aspecialissuededi-catedtothistopic.

23 TheSDRiscurrentlycomposedofabasketoffourcurrencies−thedollar,theeuro,thepoundsterling


andtheyen−whichcurrentlyaccountfor41.9,37.4,11.3and9.4percentofthetotalbasketrespectively.

24 TheneedtodevelopprivateuseofSDRsisoftenmentionedasanadditionalchallenge(Mateosylagoetal.,2009).However,aspointedoutbyocampo(2014),anSDR-basediMScouldbecombinedwithamulti-currencysystemwheretheSDRwouldbetheglobalreserveassetwhilenationalorregionalcurrencies could continue to be used in privatetransactions.However,movingtowardssuchamixedsystemwouldstill requiresubstantial institutionalchanges.

25 ThelastSDRallocationwhichtookplacein2009comprisedtheallocationof21.4billionSDRsthathadalreadybeenapprovedin1997andanewallo-cationof161.2billionSDRs(equivalent toabout$250 billion). Since the allocationwas based oniMFquotas,morethanhalfofthesefundswenttodevelopedcountries.TheseallocationsbroughtthestockoftotaloutstandingSDRstoroughly5percentofglobalnon-dollarreserves.Moreover,thealloca-tionsin2009fellconsiderablyshortoftheestimatedamountrequiredtomaintainastablesupplyofglobalreserveassets,whicharangeofstudiesestimatedat $200–$300 billion annually. For comparisonsofseveralsuchestimates,seeertenandocampo,2012:15.

26 inasense,thiswouldbeakintocreatingadevel-opment link inSDRallocations, as suggested byUNCTAD (1965).However, the potential use ofSDRs as an instrument of development financeshouldbeclearlydistinguishedfromtheirpotentiallyenhancedmonetaryfunctionsemphasizedhere.

27 Technically, this could be done in either of twoways(ocampo,2011:22):byallowingtheiMF“tocreateSDRsinalmostunlimitedamountinthefaceofamajorglobaldisturbance”orbytreatingSDRsthattheiMFhadpreviouslyallocatedbutcountrieshaveleftunusedasdeposits−or“excessreserves”−whichtheinstitutioncouldlendtocountriesinneed.

28 itshouldbenotedthattheagreedquotarevisionisrelativelysmall,sothatevenafteritsimplementa-tion, quotaswould still not reflect the increasedsharesofdevelopingcountriesintheglobaleconomy(ocampo,2011:23–24).

29 in the1970s, thedebatestalledbecauseofa lackofagreementastohowtheexchange-rateriskandpotentially ensuing losses should be distributedamongmemberStates.Calculationsofhypotheti-callossesduringtheperiod1995–2008suggestthatthesewouldhavebeensmallrelativetothesizeoftheUnitedStateseconomy,andwouldnot impairadoptingasimilarschemetoday(Kenen,2010b).

30 Foradetaileddiscussionofthesefacilities,see,forexample,MarinoandVolz,2012.

31 Themechanismsdiscussedhere concern the cur-rencyandmaturitymismatchesingrossinternational

capitalflows.Thefactthatthedollarplaysakeyroleinresolvingemergingproblemshastodowithitspositionasthedominantinternationalcurrency,andthisisnotdirectlyrelatedtothelargedeficitrecordedintheUnitedStates’currentaccountin2007–2008.indeed,atthesametime,similarliquidityshortagesneededtobeaddressedintermsoftheeuro,withtheeurozoneasawholerecordingabasicallybalancedcurrentaccountposition,andintermsoftheJapaneseyenandtheSwissfranc,withJapanandSwitzerlandrecordingsubstantialcurrentaccountsurpluses.

32 The country-specific account ofAizenman et al.(2011),forexample,indicatesthat,despiteusingalargeshareofitssizeableforeign-exchangereserves,theRepublicofKoreawasabletostabilizeitsfinan-cialmarkets inoctober2008onlyafter thebankofKoreaenteredintoswaparrangementsfirstwiththeUnitedStatesFederalReserveandthenwiththebankofJapanandthePeople’sbankofChina.

33 AttheirpeakinDecember2008,outstandingswaplinestotalledover$580billionandinvolved14for-eigncentralbanks,withtheeCbaloneaccountingfor about fourfifthsof this amount (FlemingandKlagge, 2010; bourgeon, 2015). The group ofcountriescoveredbythesearrangementsincludedfourdevelopingcountries,namelybrazil,Mexico,theRepublicofKoreaandSingapore,butbrazilandSingaporeneverdrewontheirswaps(bordoetal.,2014;bourgeon,2015).

34 ThePboC’s swap arrangementswithdeveloped-countrycentralbanks,suchas theSwissNationalbank, haveoften served to developoffshore ren-minbimarkets(SNb,2014).TheyenableimportersinthecountryofthePboC’spartnercentralbank,aswellasinthatcountry’sneighbouringregions,toeasilyobtain renminbi-denominated funds if theywishtosettletransactionsinrenminbi.Assuch,theirmainpurposehasbeentoprovideliquidityincasethereisashortageoftradefinanceandtolubricatetheemergingoffshorerenminbimoneymarkets.

35 According to an empirical analysis byGarcia-HerreroandXia(2015),thechoiceofcountrieswasinfluencedbythepartnercountry’seconomicsizeandgeographicalproximity,aswellasby itssizeofexportstoChinaanditssigningofafreetradeagreementwithChina.

36 SeeWendeP, “Por el swap conChina, elbCRAincorporóyuanesalasreservas”,Ambito Financiero,31october2014,availableat:http://www.ambito.com/diario/noticia.asp?id=765312. in october2014,thePboCconcludedasimilararrangementwith the central bank of theRussian Federation(seePboC, “Centralbanks ofChina andRussiasigned bilateral local currency swap agreement”,available at: http://www.pbc.gov.cn/publish/eng-lish/955/2014/20141015162604364930184/20141015162604364930184_.html). Contrary to the


arrangementswithcentralbanksofothercountriessuchasChile (seehttp://www.pbc.gov.cn/publish/english/955/2015/20150528095203205835709/20150528095203205835709_.html), this arrange-ment is designed not only to facilitate “bilateraltrade anddirect investment”, but also topromote“economicdevelopmentinthetwocountries”.

37 China hasmade similar arrangementswith thebolivarianRepublicofVenezuela,whereby loansthatextendoverseveralyearsareinitiallydepositedinthelatter’sforeign-exchangereservesbutaregrad-uallyusedfordevelopmentprojects,especially intheoilsector.otherChineseloanstothebolivarianRepublicofVenezuelamayalsoboost the latter’sreserves,astheirrepaymentwillbeintheformofoilandfuel(seeReuters,“ChinatolendVenezuela$10billionincomingmonths”,19March2015,avail-ableat:http://www.reuters.com/article/2015/03/19/us-venezuela-china-idUSKbN0MF2AD20150319).

38 Foradetailedaccountoftheseregionalnetworks,seeAllenandMoessner,2010.

39 For a recentproposal thatbuildson theplan thatKeynespresentedtothebrettonWoodsconferencein 1944, seeDavidson, 2007. For other sugges-tionsas tohowKeynes’ initialproposalmightbeemployedtoday,seeMateosylagoetal.,2009,andUnitedNations,2009.

40 Moreambitiousapproacheshavecalledforamend-ingArticleiVoftheiMF’sArticlesofAgreementtointroduce an obligation formemberStates to geartheir domestic policies to achievingboth domesticandglobalstability(PalaisRoyalinitiative,2011),orgivingtheiMFtherighttoidentifyrequiredmeasuresfor globally coherentmacroeconomic policies andmonitorprogress(King,2011).SuchmeasureswouldobviouslyneedtobebackedbysignificantreformoftheiMF’sgovernanceandbychangesinitsapproachestosurveillanceandmacroeconomicprocesses.

41 Foracomprehensivereviewofregionalmonetaryandfinancial arrangements, seeUNCTAD,2011;andFritzandMühlich,2014.

42 Amongthemacroeconomiccoordinationandmon-etaryintegrationmechanismsinAfrica,whicharenotpeggedtotheeuroandsupportedbytheFrenchTreasury,onlytheCommonMonetaryArea(CMA)isoperational.Thisarrangementbetweenlesotho,Namibia,SouthAfricaandSwazilandconstitutesanintegratedfinancialmarketwithinwhichthereisafreeflowoffundsandaccessbymemberstoeachother’scapitalmarkets (TDR 2007; andFritzandMühlich,2014).

43 TheSUCReisanartificialunitofvaluealongthelinesoftheSDR.itiscalculatedfromabasketofcurrenciesoftheparticipatingcountries,weightedaccordingtotheireconomicsize.

44 ASeAN+3includesthemembersoftheAssociationof SoutheastAsianNations (bruneiDarussalam,

Cambodia,indonesia,thelaoPeople’sDemocraticRepublic,Malaysia,Myanmar, the Philippines,Singapore,Thailand andVietNam), plusChina(includingHongKong (China)), Japan and theRepublicofKorea.

45 See https://www.boj.or.jp/en/announcements/release_2014/rel140717a.pdf.

46 For details, seeAMRo’swebsite at: http://www.amro-asia.org/.

47 Themaximumamountisdeterminedbyapurchas-ingmultipleappliedtoamember’scontributiontotheCMiM,where the country-specificmultiplesrangebetween0.5 (forChina and Japan) and5.0(for a number of smallmember economies). Forexample,itisroughly$34billionforChina,$38bil-lionforJapanandabout$23billionforeachofthemajorASeANeconomies(indonesia,Malaysia,thePhilippines,SingaporeandThailand).TheshareofthisamountthatcanbedrawnwithoutaniMFlinkhasbeenincreasedinsteps,fromaninitial10percenttothecurrent30percent,andthereareplanstoincreaseitfurtherto40percent.ThisrequirementhasremainedinplacesincetheCMi’sinceptioninorder toaddressmoralhazard,which isseenasaproblemduetothecontinuedlackofregionalsur-veillancethatwouldhavesufficientpoliticalauthor-ity,andinsufficienthumanandfinancialresources(Rheeetal.,2013;Shimizu,2013).Fordetailsonthe 2014 amendment of theCMiM, see: https://www.boj.or.jp/en/announcements/release_2014/rel140717a.pdf.

48 The swap arrangement envisaged as part of thebRiCSContingencyReserveArrangement (afterits creatorsbrazil, theRussianFederation, india,ChinaandSouthAfrica),which,asofMay2015,wasscheduledtostartoperatingbytheendof2015,would be interregional in character.However, itwouldnotincludeacentralbankissuinganinter-national currency, though thismay change overtime,with the renminbiassumingan increasinglyimportantroleasaninternationalcurrency.butwithagreedinitialresourcesof$100billion,itwillremainsignificantlysmallerthaneventheCMiM,andittoowouldincludeaniMFlinkforwithdrawalsexceed-ing30per cent of amember country’s limit. Forfurther details, see: http://brics6.itamaraty.gov.br/media2/press-releases/220-treaty-for-the-establish-ment-of-a-brics-contingent-reserve-arrangement-fortaleza-july-15.

49 eachmemberhasonevote,withdecisionsrequiringa75percentapprovalformostoftheagreements,and80percentrequirementforspecialagreementssuchascapitalaugmentation.

50 HistoricalprecedentsofsuchregionalclearinghousesincludetheeuropeanPaymentsUnion(ePU),whichexisted during the period 1950–1958, aswell astosomeextentthelAiA.Asimilarmechanismis


includedintheSUCReinitiativelaunchedin2009,thoughitisnotyetoperational(forfurtherdiscus-sion,seeUNCTAD,2011).

51 it is possible that intraregional imbalanceswouldresult from certain development strategieswhichcouldbe taken into consideration by themember

countrieswhendesigningamechanismtoaddressthose imbalances, such as if a country acts as aregionalengineofgrowth.

52 it shouldbeemphasized that theobjectiveof thischartispurelyillustrative,anddoesnotreflectpre-cisenumericalevidence.

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