So far, not much seems to be working when it comes to stemming our great economic and financial crisis. Could tooth fairies help?
But before the fantastical, a bit of history is needed: some experts are considering a major expansion of the resources of the International Monetary Fund (IMF) by a method envisaged at its founding in 1944 by the great economist John Maynard Keynes. The mechanism for doing this is to expand the issue of what the IMF calls “Special Drawing Rights” (SDRs), or what Keynes considered to be “paper gold.”
This is one of the important items on the agenda at Thursday’s summit of the G-20 in London. SDRs could prove to be a major contribution to curing the world’s crisis of liquidity and lack of demand.
Moreover, some members of the G-20 seem willing to support the revolutionary suggestion made earlier this month by Zhou Xiaochuan, the boss of China’s central bank, to use SDRs as a worldwide reserve currency to replace the dollar and the euro, at present the two most important world reserve currencies, although US Treasury Secretary Tim Geithner suggested last week that was not likely anytime soon.
What do fairies have to do with it? SDR’s are created almost literally at the stroke of a pen—an accounting transaction within a ledger of accounts which can then be used to bolster the financial reserves of any IMF member country. And, to sweeten the pot, the fairies don’t even require a tooth.
The IMF can allocate these SDRs to any of its members—especially those in desperate need—giving these countries a costless asset for which interest is neither earned nor paid. Recipient countries, with important provisos, can use these SDRs to purchase the currencies of other IMF members that are in a healthier financial state than they are. Richer countries can also use them as a form of aid to poorer countries.
So far, there have been two major allocations of SDRs—one in 1970-72 and the second in 1979-81. In 1997, the board of the IMF agreed, in principle, on a much larger allocation—double the total of the two allocations before. Three-fifths of the member states, however, had to agree to this before the IMF could start using this new allocation. So far, over 130 members have signed on; the only thing holding it up is U.S. approval.
Thus, with another stroke of the pen, the United States could put this allocation into effect. It would have a powerful stimulating effect, especially for those countries at the bottom of the heap.
We have had to watch the future prospects of southern Africa being sabotaged by the crass behavior of the rich—by Lehman Brothers and then by the other large number of Western banks and financial institutions that have followed Lehman into a downward spiral. The tragedy of the present day is compounded by the knowledge that over the last decade well over half of sub-Sahara Africa has pulled itself up by its own bootstraps, achieving growth rates of 6 percent or more. (In some cases, like Nigeria and Mozambique, significantly more.) Now, over night growth has been cut by at least half.
An important advantage of a new, large SDR issue—compared with quota increases or borrowing from the IMF (both also on the London agenda)—is that it can be done fast. Another is that it does not create repayment obligations, which would increase the debt burden. Indeed, it will reduce it.
The more steps that are taken towards an SDR-based monetary system the better. As long as the world is dependent on the policies of a few reserve currency countries and the whims of the international capital markets, there can be no effective control of the aggregate volume of world liquidity. Moreover, by giving the G-20 countries the ability to influence and even control world reserve growth, the pressing need to expand the global economy can be met without the risk of high inflation.
The IMF has played and continues to play, despite its chronic deficiency of resources, a crucial role in helping countries who take its loans to find a more efficient and disciplined road to growth. But the borrower-lender relationship has often been antagonistic, even though the advice and demands of the IMF have been more often right than wrong.
Although the SDR’s would come without formal conditions, they would inevitably increase the clout of the IMF. Only if the carrot of SDR allocation is present can the IMF use the stick of sound economic and financial choices in this time of difficult policy alternatives.
The tooth fairies have given the G-20 a tool they could quickly agree to wield—and President Barack Obama, whilst in London, should commit the United States to sign up for it within a week or two at the most.
Jonathan Power is a syndicated columnist and a contributing editor ofProspect magazine, London. His most recent book is Conundrums of Humanity (Martinus Nijhoff, 2007).