Saturday, July 16, 2016

Jose Antonio Ocampo Calls on China to Promote the SDR at the G20 this Fall

In a recent article published on Project Syndicate, Jose Antonio Ocampo says he hopes China will use the upcoming G20 meeting this fall to push forward on an expanded role for the SDR including issuing SDR denominated bonds. We have long noted here that this would be a big step for the SDR. Below are some quotes from the article.


"In the run-up to this September’s G20 summit in Hangzhou, China, there has been much talk about strengthening global macroeconomic cooperation and reforming the international monetary system. While this is far from the first time these topics have come up – in 2011, for example, France pushed for monetary reform, but was waylaid by the eurozone crisis – the time may be ripe for genuine progress.

Today’s global economy is plagued by uncertainty. Inconsistent data have lately raised questions about the strength of the United States’ economy. When it comes to Japan, the data are even more erratic. The European Union faces not only a still-weak recovery, but also the possibility of losing the United Kingdom as a member.

The emerging world, meanwhile, is experiencing a sharp economic slowdown. China, in particular, poses a significant risk, with many fearing that its downturn will be more severe than initially anticipated. This has spurred many to move their capital out of the country, generating strong downward pressure on the renminbi.

This highlights another source of uncertainty today: exchange rates. From the euro’s decline in 2014-2015 to the US dollar’s decline after the Federal Reserve signaled a postponement of its rate increases to the British pound’s recent drop, spurred by uncertainty surrounding the recent referendum on EU membership, major currencies have been all over the map in recent years. Some have even mooted suspicions of competitive devaluation."

. . . . . 

"Macroeconomic cooperation clearly must be made more effective. But, as recent exchange-rate volatility has shown, even that will not be enough to stabilize the global economy. Monetary reform is also needed.

Such reform must include a reconsideration of the US dollar’s outsize role in shaping the international monetary system. In an increasingly multipolar world, would it not be more appropriate to build a multicurrency system and make greater use of the only global currency that has ever been created: the IMF’s Special Drawing Rights (SDRs)?

Establishing the SDR as the leading global reserve currency would have far-reaching benefits. It would allow all countries – not just major economic powers – to enjoy “seigniorage,” or the profits brought by money creation. Moreover, as the IMF economist Jacques Polak suggested long ago, the IMF could finance its programs by creating SDRs, eliminating the cumbersome negotiations required to secure credits or raise member quotas. And SDRs could support development; for example, they could be allocated in a larger proportion to developing countries, which have greater demand for foreign-exchange reserves.

China’s G20 leadership could be the impetus the group needs to initiate this shift. .  .  .  ."

"The G20’s China summit represents an important opportunity to improve macroeconomic cooperation and launch major reforms of the global monetary system. For the sake of balanced growth in developed and developing countries alike, it must not be squandered."

Added note: I will have a followup article next Monday (7-18-16) on this that looks at a recent IMF proposal to study the potential for expanding the role of the SDR. It will include some direct comments given me on this from the former Head of the SDR Division at IMF (Dr. Warren Coats) that I believe readers will find very interesting and informative.

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