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The International Monetary Non-System

The global financial crisis placed the issue of global macroeconomic and financial stability at the center of the international policy-agenda. Several steps have been made to re-regulate finance. In contrast to that, and despite prominent initiatives, efforts to reform the international monetary system have been very limited. Furthermore, despite several specific contributions to the debate on global monetary reform, there is no recent comprehensive and compelling treatment of this subject.

Several steps have been made to re-regulate finance, but efforts to reform the international monetary system have been very limited.

The project aims at publishing a book that provides a systematic analysis of global monetary reform, based on the basic diagnosis of the current system as an incoherent framework (a “non-system”). On that basis, a proposal of “a comprehensive yet evolutionary reform” would be made –i.e., a reform that transforms elements of existing arrangements into a better global monetary system. The project emphasizes the asymmetries that emerging and developing countries face within the current system, particularly the greater vulnerability to current and capital account crises and their incapacity to create international liquidity (the emerging Chinese case aside).

The project is organized around seven major topics: 

(1) A brief history of international monetary reform efforts. This brief history will highlight the elements of the original Bretton Woods arrangement and reform efforts at three critical moments in time. The first and most importantly is the late 1960s/early 1970s, when the Special Drawing Rights (SDRs) were created, the original Bretton Woods arrangements collapsed and failed reform efforts were undertaken in 1992-1994 in the Committee of 20. The second is the period from the late 1970s to the mid-1980s, which can be characterized as dollar crisis but also the beginning of the crises of emerging economies. The third will cover the major crises of emerging economies of the 1990s and the still ongoing North-Atlantic financial crisis, both of which led to major rethinking on how to prevent and manage massive capital account crises.

(2) The provision of global liquidity: the global reserve system. This part will analyze the basic deficiencies of the current global reserve system and the role of different currencies, including that of the dollar, the euro and its performance during the ongoing crisis, and the attempts by China to internationalize the renminbi. It would also look at the current role of SDRs in the system and the proposals to enhance it, including, in particular, the possibility of financing all IMF operations with SDRs and putting in place, either on a transitory or permanent basis, a substitution account to facilitate conversion into SDRs assets held by central banks in global currencies.

(3) Global macroeconomic cooperation and the exchange rate system. The major issues in this regard are global imbalances and their evolution, and the different forms of global macroeconomic policy cooperation, both informal (through the G-7 and among major central banks) and formal (through the IMF). Since exchange rate variations are expected to be one of the (or even the) major mechanism of adjustment to such imbalances, it would look at its effectiveness in playing that role. In this context, it would discuss the June 2007 IMF decision on bilateral surveillance of exchange rate policies and alternative proposals to design a system of reference rates among major currencies or to introduce hard criteria to determine what “manipulating” the exchange rate means.

(4) Capital account liberalization and management of capital flows. The Bretton Woods arrangements allowed countries to use capital account regulations (controls) to manage balance of payments disequilibria. Since the reconstruction of the global financial system in the 1960s, capital flows have become the major source of large balance of payments crises. In this context, the pressure on countries to liberalize their capital account became a central issue in policy and academic debate. The current financial crisis placed this issue at the center of global debates, leading to the adoption of an IMF “institutional view” on capital account liberalization and management in 2012, which has nonetheless not settled the debate. 

(5) Crisis resolution: balance of payments financing and debt workouts. In this context, the essential topic is the evolution of IMF credit lines and the debate on the conditionality associated with them. They are complemented by regional arrangements and swap arrangements, particularly in the latter case those used on a large scale by the Federal Reserve during the recent crisis. Advance in this area contrasts with major gaps in the management of debt overhangs and the policy debate on the topic, including modalities of voluntary renegotiations vs. unilateral defaults, the advantage and limitations of collective action clauses in debt contracts, and the failed attempt by the IMF to create in 2001-03 a Sovereign Debt Restructuring Mechanism (SDRM).

(6) Governance issues in the international monetary system. In a broad sense, there are three major issues governance issues in relation to the international monetary system: (i) the design of the apex organization, in particular the role now played by the G-20 and proposals to change it; (ii) the of “voice and participation” of developing countries in the Bretton Woods Institutions, and in particular the debate on IMF quota reform; and (iii) the possible design of a “dense”, multi-layered architecture, with active participation of global, regional and sub-regional institutions.

(7) Comprehensive yet evolutionary reform and its implications for developing countries. The foregoing analysis should lead to a proposal of the elements of a comprehensive reform which would evolve out of existing arrangements. This proposal will consider, in particular, the implications for developing countries, taking into account the heterogeneity that characterizes them today.



Professor of Professional Practice in the Faculty of International and Public Affairs


International & Public Affairs
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