INTERNATIONAL MONETARY SYSTEM
Global Monetary Reforms Needed to Tackle Imbalances
IMF Survey online
February 11, 2011
- Wide-ranging reform of international monetary system still needed
- Political will needed to sustain cooperation and implement reforms
- Large and volatile capital flows, exchange rate pressures persist
- Possible greater role for IMF's SDRs in monetary stability in longer run
Wide-ranging reform of the international monetary system is still needed to secure a well-balanced and sustainable recovery, and help prevent future crises, experts said at a panel discussion at the IMF in Washington, D.C.
The global recovery should not be an excuse to put reform on the backburner. “Global imbalances are back, with issues that worried us before the crisis—large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves,” IMF Managing Director Dominique Strauss-Kahn said.
Concerns that the recovery is not yet delivering on much needed employment growth and equality were voiced by Strauss-Kahn and fellow panelist Kemal Derviş of the Brookings Institution at the February 10 event. “The world is doing reasonably well … but in terms of labor markets and employment there is a huge problem … almost everywhere,” Derviş said.
“Reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system’s ability to prevent future crises,” Strauss-Kahn told the 100-plus audience.
While acknowledging the progress that had been made in expanding the tools to deal with crisis, Tim Adams, Managing Director of the Lindsey Group, was also “focused on the big issues, and that is imbalances.”
The problem is not just demand imbalances that contribute to disruptive flows. According to Derviş, the “accumulation of liquid assets in dollars year after year … could be extremely destabilizing.”
Global rebalancing should focus on dealing with large exchange rate misalignments, argued Fred Bergsten, Director of the Peterson Institute for International Economics. However, he acknowledged that “at present, most of the major exchange rates are in reasonable alignment” and, for the renminbi “there is significant evidence that misalignment is moving toward a correction.”
Panelists agreed that strengthening IMF surveillance—better monitoring economic and financial conditions, policies, and risks—would also help in setting policies that promote global balance, reduce volatility, and avert future crises.
“It’s the job of the Fund to be cautious and proactive … The Fund should not neglect to point out the risks,” said Derviş.
Derviş was right to say that we have to err on the side of caution, Strauss-Kahn said. He pointed to steps the IMF had taken to strengthen surveillance—including the early warning exercise, new ‘spillover reports’ on the cross-border impact of systemic countries’ policies, and delving deeper into macro-financial linkages.
Enforcement and cooperation
“The crisis marked a watershed moment for international policy cooperation—leaders took the actions necessary to overcome domestic and global economic challenges,” said Strauss-Kahn. But, with the crisis behind us, more concerted effort and political will is needed to sustain cooperation and implement reforms.
“There’s not a need for new rules in the IMF … The rules are there, but implementation has been a problem … enforcement tools should be brought into the picture,” Bergsten said.
Strauss-Kahn agreed with the need for better enforcement, but “the right way to enforce what the IMF provides as guidelines is political involvement of ministers and leaders.”
Adams summed it up. “We’ve had five G-20 summits over the past two years … and their communiqués have done a very good job of addressing the problems and challenges … The problem is not technical ... The problem we have is sheer political will to implement what all these countries have signed on to.”
Managing global liquidity
The dramatic increase in the size and volatility of capital flows over the past decade was a major source of concern. “There’s a wall of capital sloshing around the world, in and out of emerging markets. We need to better understand what drives it, and … we need some common rules,” Adams said.
Strauss-Kahn agreed with the need to explore globally agreed “rules of the road” for managing capital flows. While “such flows are beneficial to the receiving economies ... they can also complicate macroeconomic management and threaten financial stability,” he added.
Global financial safety net
For those occasions where extreme volatility persists, efforts to strengthen the IMF’s financing toolkit would help deal with the next crisis.
Adams pointed to the IMF’s “creative” response to the crisis. Improvements in “the Flexible Credit Line, the Precautionary Credit Line, the response to Europe, [and] the variety of other instruments that have been put in place really shows that the light bulbs are on.”
However, strengthening the IMF’s work with regional financial entities will also help ensure a more effective global financial safety net. The IMF needs to “work in a mutually reinforcing way with those big regional monetary funds,” Bergsten said, “building on the strengths of each to support a more effective, more efficient, global monetary system.”
Greater role for SDR
Turning from addressing an influx of capital to ways to ensure liquidity in times of extreme volatility, panelists agreed that the IMF’s Special Drawing Rights (SDRs) could contribute, over time, to a more stable international monetary system and it would be worth experimenting with it.
“There are many things that can be done to promote a greater role for the SDR,” said Bergsten. He suggested regular annual allocations of SDRs—say a trillion dollars of additional SDRs over 5 years—would make a “significant difference over time in the role of the SDR”.
Derviş favored a more measured approach. “It won’t work to have some grand design for how the SDR should behave and be used in the system … it has to evolve from behavior … However, some design that accompanies behavior is feasible and useful, and that’s how I read the IMF’s latest paper,” Derviş.
On that note, Strauss-Kahn outlined some of the ideas in the IMF paper, noting that there were “a number of technical hurdles” to increasing the role of the SDR. It would also “require a major leap in international policy coordination. For this reason, I expect the global reserve asset system to evolve only gradually,” he said.