REFORMING THE GLOBAL RESERVE SYSTEM Presentation in the Conference celebrating the 30 th Anniversary of WIDER September 18 th, , 2015 José Antonio Ocampo Columbia University
FIVE ESSENTIAL ELEMENTS OF A DESIRABLE ARCHITECTURE 1. An international reserve system that guarantees the provision of global liquidity and is considered as fair by all parties. 2. Consistency of national economic policies (particularly of major economies) + avoid negative spillovers on other countries (particularly through exchange rates). 3. Regulation of finance, including of cross-border capital flows, to avoid excessive risk accumulation, and moderate the pro-cyclicality of markets. 4. Larger emergency financing during crises (with further reforms in conditionality). 5. International debt workout mechanisms to manage problems of over-indebtedness.
THE GLOBAL RESERVE SYSTEM: The problems 1. The asymmetric adjustment problem: asymmetric burden of adjustment of deficit vs. surplus countries generates deflationary (recessionary) bias. 2. Triffin dilemma: problems associated with the use of a national currency as an international currency (inflationary and deflationary biases, instability of the core currency). 3. Growing inequities associated with demand for reserves by developing countries (self- insurance) + fallacy of composition effect (inequity-instability link)
ASYMMETRIC ADJUSTMENT: THE EUROZONE CASE … 15.0 Current account surplus or deficit of the Eurozone economies (% of GDP) 10.0 5.0 Germany Netherlands France Italy 0.0 Ireland 2005 2006 2007 2008 2009 2010 2011 2012 2013 Spain Portugal -5.0 Greece -10.0 -15.0
… CONTRIBUTING TO GLOBAL IMBALANCES Current account imbalances (billion dollars) 600 400 United States European Union 200 Japan Oil exporting countries 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 China Other Asian emerging economies -200 Other emerging and developing countries -400 -600 -800
U.S. DEFICITS AND INSTABILITY OF THE VALUE OF THE DOLLAR U.S. Current Account Balance and Real Exchange Rate 2.0% 140 1.0% 130 0.0% 120 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 -1.0% 110 -2.0% 100 -3.0% 90 -4.0% 80 -5.0% 70 -6.0% 60 Current account (% of GDP) Real Exchange Rate (2000=100)
GROWING DEMAND FOR FOREIGN EXCHANGE RESERVES BY DEVELOPING COUNTRIES 60% Foreign exchange reserves by level of development (% of GDP) 50% Core OECD, excluding Japan Japan Upper middle income 40% Lower middle income, excluding China China Low income 30% Gulf countries 20% 10% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
THE GLOBAL RESERVE SYSTEM: Two alternative/complementary routes Multi-currency standard Provides diversification + would not be unstable as past systems of its kind (thanks to flexible exchange rates) But new instabilities + equally inequitable A SDR-based system Counter-cyclical issues of SDRs equivalent in long-term to demand for reserves. IMF lending in SDRs: keeping unused SDRs as deposits in the IMF that can be used to finance its programs (or Polak alternative). A substitution account to manage instabilities of multiple reserve currencies.
THE GLOBAL RESERVE SYSTEM: Possible “development links” Two basic alternatives Asymmetric issue of SDRs (taking into account the demand for reserves) Use excess SDRs for buying bonds from MDBs (or capitalizing development or climate funds). Fiscal use (financing ODA or climate change mitigation programs) is not the best alternative.
THE GLOBAL RESERVE SYSTEM: Some features of the SDRs Both an asset and a liability. It effectively works as an unconditional overdraft facility. Criteria for allocations: long -term need, of a global character, to supplement existing reserve assets. Most estimates (Bergsten, Kenen, Ocampo, Stiglitz, Williamson, 2011 IMF staff document) talk of at least $200b annually, some of up to $400 vs. about $500b in annual demand for reserves. Basket should be based on use of currencies in trade and foreign exchange reserves. Full convertibility was originally not, and should not be the basic criterion.
THE “MARKET” FOR SDRs IS ACTIVE BUT SMALL Total Net Drawings of SDRs (in millions of SDRs) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
DEVELOPING COUNTRIES GET LESS THAN 40% OF SDR ALLOCATIONS Share in SDR allocations by level of develoment in 2000 1970-72 1979-81 2009 High income: OECD 73.6% 65.8% 59.7% United States 24.8% 21.7% 16.7% Japan 4.1% 4.3% 6.2% Others 44.7% 39.8% 36.8% High income: non-OECD 0.2% 1.1% 1.8% Gulf countries 0.0% 0.7% 1.1% Excluding Gulf countries 0.2% 0.4% 0.7% Middle income 16.3% 22.9% 30.1% China 0.0% 2.0% 3.7% Excluding China 16.3% 21.0% 26.4% Low income 9.9% 10.2% 8.3%
AN UNSETTLED ISSUE IN CRISIS PREVENTION: THE ROLE OF CAPITAL ACCOUNT REGULATIONS Regulation of cross-border capital flows is an essential ingredient of global financial regulation has not been recognized by G-20/FSB, partly so by IMF. It should be seen as an essential element of macroeconomic management in emerging economies, not as a “last instance intervention” The major problem today is the management of the asymmetric monetary policies that the world requires today. So long as source countries are not active participants, the issue will remain unsettled.
CRISIS RESOLUTION: EMERGENCY LENDING Better credit lines: Supplemental Reserve Facility in 1997. Contingency credit line in 1999, eliminated in 2003. Major reforms of 2009 and 2010: larger facilities, flexible credit line and other contingency facilities + no structural benchmarks. Conditionality: Since the beginnings of the IMF, of a macro character. Debate on “external” vs. “internal” origin, and rise of fairly unconditional contingency credit lines in 1970s. Climbing conditionality in 1980s and 1990s. 2002 reform: it should be macro relevant. Lending to industrial countries renews in 2009
LARGE INCRESE IN IMF FINANCING IMF Loans by Level of Development (Million SDRs) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Low-income countries Middle-income countries High-income countries Unclassified
THE UNSETTLED ISSUE OF SOVEREIGN DEBT CRISIS RESOLUTION Lack of regular institutional mechanisms to manage debt overhangs: only Paris Club + case-by-case negotiations. The system does not produce adequate and timely debt relief, and does not treats different debtors, and different creditors with uniform rules. Best try: IMF proposal for an SDRM (Sovereign Debt Restructuring). September 2015: UN General Assembly agrees on principles for sovereign debt restructuring. Contractual arrangements: collective action clauses (2003 in US) + aggregation clauses (EU in 2013) + meaning of pari passu clause. Improved in 2014 by ICMA and IMF. Possible use of a WTO-type panel system in the framework of the IMF: successive negotiation, mediation and arbitration.
REFORMING THE GLOBAL RESERVE SYSTEM Presentation in the Conference celebrating the 30 th Anniversary of WIDER September 18 th, , 2015 José Antonio Ocampo Columbia University
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