March 8, 2011
Contact: Jamie Baker
New Rules for Global Finance
New Rules Weekly Update
SDRs: a valuable tool for enhancing the legitimacy of the international monetary system
Tuesday March 8, 2011
By Michael Prowse, Senior Visiting Fellow
The fundamental flaw in the current international monetary system (or non-system, as many would have it), is that there is no effective way of ensuring individual countries’ economic policies are mutually consistent, still less that they collectively promote non-inflationary global growth.
The possibility of coordinating on policies to achieve environmentally sustainable growth or a fairer distribution of income and wealth both within nations and between developed and developing economies remains yet more remote.
The root cause of these failings is that most nations are still unable to look beyond their economic self-interest. In spite of occasional rhetoric to the contrary, they mostly adopt economic policies aimed at domestic needs, without taking account of the spill-over effects on others. As members of the Palais-Royal Initiative noted in a recent report on reforming the global system, countries need to understand that effective cooperation is “a necessary ingredient in the search for national prosperity”*.
If more effective cooperation is to be achieved, two realities must be recognised.
The first is that the principal architect of global cooperation is going to be the International Monetary Fund. The second is that the centre of economic gravity has shifted, irreversibly, to the east. China is now the world’s second largest economy, and emerging and developing economies will soon account for more than 50 per cent of global GDP. This means the US and Europe can no longer expect to be the sole arbiters of the structure of a future international monetary system. It will have to reflect non-western interests and values.
The IMF is going to supervise global cooperation not because it is a flawless institution or because it is the sole repository of relevant expertise. It will be pre-eminent simply because it has been doing the job, to the degree permitted by its now dated Articles, for decades. It would be extravagant and pointless to create a new institution which would anyway end up looking very much like the IMF.