Reflections on Reserve Management and International Monetary Cooperation

Today, the management of a country’s international reserve assets,  as well as the international assets of any sovereign wealth funds (SWF), is a central financial responsibility of governments. At the end of 2011, international reserve assets alone amounted to 17 percent of world GDP and an average of 29 percent of the national GDP of emerging market and developing countries. See the attached table. Including the international assets of SWFs and similar entities would boost those percentages substantially above 20 percent and close to 40 percent respectively. At a 5 percent total return, those assets yield 1 to 2 percent of GDP per year. Consequently, the wise management of these assets is in the strong interests of the citizens of the home countries. However, equally important are accountability, transparency, and the interests of the global economy and financial system in the management of these assets: the focus of my remarks. They are drawn from my experience with issues of reserve management and international monetary cooperation over the past 50 years.

I have four central points.

First, managers of international assets should be held accountable to their stakeholders, foreign as well as domestic.

Second, transparency aids in establishing this accountability.

Third, international cooperation is also essential if the management of international assets is to contribute to global economic and financial stability.

Fourth, over the years,  progress has been made on some aspects of international cooperation on managing international assets, but that progress has not kept pace with the increased need for cooperation. That need derives from increases in the size of official holdings, and in the number of substantial holders, as well as the evolution of the multicurrency system.

The 1960s

During the 1960s, the principal reserve asset was gold and the major holders of those reserves were the advanced countries, essentially the Group of Ten (G-10) group consisting of eight countries in Western Europe, the United States, Japan, and Canada. The central issue in reserve management was whether to hold a country’s reserves in gold, yielding a zero but very safe nominal return, or in claims on the dominant reserve currency country (the United States) and earn a positive nominal, and generally real, return. Some countries held their reserves in sterling, but that was not particularly attractive given UK restrictions that were imposed on the use of some of those reserves by some holders.