“This one seems a no-brainer to me. The easiest and quickest way to create global liquidity and enable credit-starved emerging and developing countries to increase their spending is for the IMF to engineer a vast new SDR [Special Drawing Rights] allocation. It can be done at the stroke of a pen, and it does not require the IMF to negotiate a program for every country that needs a loan.
Let's remember some basic facts. The U.S. fiscal stimulus will be a lot less effective if it is not accompanied by similar fiscal action elsewhere. Developing nations are severely limited in what they can do in this respect because they have little room for domestic borrowing. Serious fiscal stimulus requires that they have resort to external resources, of which there is a severe shortage at the moment (both because of the flight to quality and the borrowing that is going on in the developed world). The existing swap lines and the IMF's new short-term lending facility have had few takers, in part because no country wants to signal that they are (or may be) in trouble and running out of resources. A generalized SDR allocation--in return for a commitment to spend a share of these resources in pursuit of a globally coordinated fiscal stimulus — would give countries the cover needed to do what is good for them and for the rest of the world without suffering a reputational penalty.
The main objection to the creation of SDRs has always been that this would be inflationary. In the current environment, this is a plus rather than a minus. Inflationary, you say? Pile it on! That is exactly what the doctor ordered.
So if you want to reduce protectionist pressures in the U.S. and elsewhere while helping the developing countries get over a crisis that is not their doing, SDRs can be a large part of the solution. So I repeat my question: why don't we hear more about this?”
Dani Rodrik, “Why don't we hear a lot more about SDRs”, Dani Rodrik's Weblog (3 February 2009).
http://rodrik.typepad.com/dani_rodriks_weblog/2009/02/why-dont-we-hear-a-lot-more-about-sdrs.html
The writer is professor of international political economy at Harvard's Kennedy School of Government.
Special Drawing Rights of the IMF are a faux world money used as a unit of account by international agencies and as a limited reserve asset by countries. It is neither a currency nor a claim on the IMF. However, in settlements among countries it is a potential claim on the freely usable currencies of IMF members under certain defined and restricted circumstances. Its value is defined by a basket of currencies consisting of the euro, Japanese yen, British pound sterling, and the U.S. dollar. A SDR today is valued at about $1.50.
Allocations of SDRs by the IMF provide its member-states with a costless asset on which interest is neither earned nor paid provided its holdings remain as initially allocated. If a country’s holdings rise, it earns interest; if its holdings fall, the country pays interest. Countries may voluntarily exchange SDRs or countries with strong external positions may be designated by the IMF to purchase SDRs from countries with weak external positions. In this way, international liquidity is increased.
New allocations of SDRs would add to the liquidity of global markets and, presumably, help in the immediate situation. But new allocations of SDRs are very difficult to approve. The first general allocation for SDR 9.3 billion was distributed in 1970-72 and a second for SDR 21.4 was distributed in 1979-81. In 1997 a special one-time allocation has been approved by the IMF Board of Governors and many IMF members but it awaits approval of the United States.
This points to major problems with this proposal. In the first place, allocations of SDRs require the approval of Fund members with 85 per cent of its total voting power. Given the weight of the U.S. in IMF decision-making, and the financial implications of new SDRs for the Federal budget, this effectively gives the U.S. Congress a veto on any issuance of SDRs. Second, when allocated, SDRs are distributed in accordance with IMF quotas, which means that the emerging and developing countries -- those most in need of additional liquidity -- would receive only small allocations. Moreover, allocations would go to those countries, such as the Sudan and Zimbabwe, currently under U.S. sanctions. Finally, while helpful in the short-term, additional global liquidity in the long-run could further aggravate the already extensive external imbalances that describe the world economy by postponing needed adjustment in those countries with wide trade deficits.
I for one am doubtful that any new SDR allocations will be approved at this time.
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