International Monetary System Reform: Will the G-20 Make Significant Progress?
President Sarkozy of France, current head of the G-20, has slipped comfortably into France's traditional role of calling for fundamental reform of the international monetary system (IMS). On February 19, the G-20 finance ministers and central bank governors met in Paris and dutifully laid out a work program "aimed at strengthening the functioning of the IMS." Will France and the G-20 be able to deliver more IMS reform than in previous efforts over the past four decades? The probable answer is no. At best, one can hope for a dialogue in sufficient depth that it will produce modest evolution, but fundamental IMS reform is likely to remain out of reach.
The principal reasons for such lack of progress are, first, the non-acceptance by countries, in particular the systemically important countries, such as the members of the G-20, of any individual obligation to promote global economic and financial stability, and second, the absence of consensus on what needs fixing in the current system, or non-system as some prefer to describe it.
With respect to the promotion of global economic and financial stability, countries today voluntarily cooperate through such mechanisms as the financial stability board and the G-20 itself to adopt and adapt national policies that are intended to contribute to global stability. But voluntary cooperation is as far as these processes can take us. Countries have no formal obligation to subject their policies to a global standard. The obligations currently enshrined in the Articles of Agreement of the International Monetary Fund (IMF), for example, are limited to the promotion of internal and external stability of each individual country by itself.
With respect to what needs fixing in the IMS, views and priorities are diverse. In the wake of the global economic and financial crisis and the associated backlash against the United States and its policies, representatives of France and a number of other countries have focused on the role of the US dollar in the international monetary system. These critics tend to elide the distinction between the US dollar's somewhat reduced share of international reserves (about 60 percent) and the dollar's quantitatively much more important role in the international financial system, in which the stock of assets is at least six times as large and activity is dominated by the private-sector institutions and decision making. Altering the dollar's reserve role would have little or no impact on the dollar's role in private international transactions or on global imbalances.
Representatives of other countries focus on international capital flows, which overwhelmingly involve the private sector but may be influenced by the monetary and financial policies of governments. This more relevant strand of the debate about the IMS has seen a revival of discussion of capital account liberalization and capital controls in the context of macroprudential concerns as well as of possible distortions to the global economy and financial system introduced by such controls.
A third strand of the IMS debate involves the potential problems associated with current account imbalances and the shortcomings of the global adjustment process. When national policies are rooted in countries' concerns with internal and external balance in their own economies, largely ignoring spillover effects on other economies and implications for the global economy and financial system, the system as a whole may be adversely impacted.
IMS reform should be about each of these issue areas and more. IMS reform should be comprehensive, and it should strengthen the IMF as the central institution of the system.
One example of a promising, comprehensive agenda for IMS reform is the report of the Palais-Royal Initiative. In this effort, Michel Camdessus, Alexandre Lamfalussy, and Tommaso Padoa-Schioppa assembled a group 18 people from 15 countries to lay out a cooperative approach to reform the IMS for the 21st century. I was honored to participate in the group, which advanced 18 suggestions. The individual suggestions attracted different degrees of enthusiasm from the individual participants, but the group was able to agree that each of them should be on the agenda for discussion. In my view, the merit of the report of the Palais-Royal Initiative is that it is comprehensive and makes concrete suggestions that merit serious consideration. Five features of the report deserve to be highlighted.
First, the report calls for amendment of the IMF Articles of Agreement to establish for each IMF member the obligation to promote not only domestic internal and external stability but also global economic and financial stability. Some observers argue that the current IMF article IV on exchange rate arrangements establishes this obligation, but that is not how it has been interpreted.
Second, the report calls for the establishment of norms applicable to all members, but in particular systemically important countries, with regard to their policies and economic and financial performance, including but not solely with respect to exchange rates. Moreover, a country's performance relative to those norms would be systematically assessed. Most important, if a country were not living up to its obligations it would be subject to consequences, in other words sanctions. This approach is consistent with what I advocated in my recent proposal to strengthen IMF surveillance. It differs in three respects from the G-20's effort to establish indicators and indicative guidelines for global imbalances: The focus is on more than external imbalances, compliance involves more than a peer-review process, and lack of compliance may result in concrete sanctions.
Third, the report recognizes that the phenomenon of global liquidity is poorly understood and essentially undefined. The report also recognizes that the IMF has an important role to play in this area, not only with respect to enhancing understanding but also in monitoring capital controls and other policies that influence capital flows to ensure that they do not add further distortions to the system as a whole and do not frustrate needed adjustment. The report recommends amending the IMF Articles of Agreement to achieve this objective. It also recommends consideration of a number of ways in which the IMF's role as the principal international lender of last resort could be enhanced.
Fourth, the report makes a number of suggestions for consideration with respect to special drawing rights (SDR) and the role of the SDR in the system. This set of recommendations is controversial, but the issues surrounding the role of the SDR deserve serious consideration if for no other reason than to set them aside once and for all.
Finally, the report of the Palais-Royal Initiative makes several suggestions with respect to systemic governance in order to enhance the role of the IMF in the system. Many of these suggestions have been debated for years, but the emergence of the G-20 has given them new prominence. The core issue is whether the G-20 will operate outside the system or within a more comprehensive system.
The G-20's work program outlined in the February 19 Paris communiqué touches at least indirectly on most of these topics. Although I am skeptical whether the G-20 will be able to agree to substantial, revolutionary changes to the IMS, I am hopeful that the process of examination of these issues will enhance understanding of the IMS and over time promote its further constructive evolution.