Redesigning the International Monetary System: A Davos Debate
Thursday 27th January 2011 - 4:00pm - 5:15pm
Thursday 27 January, 16.00 - 17.15
How should the international monetary system evolve to improve macroeconomic coordination?
The following dimensions will be addressed:
- Lessons from previous crises
- Options for international monetary system reform
- Enhanced G20 coordination
- Possible scenarios
- International coordination on monetary issues is vital but there is no broad agreement on how this can be achieved or through what mechanism.
- The role of the US dollar as the international reserve currency is declining and agreement must be reached on what can replace it.
- There are many conflicting interests in G20 countries and, although they came together during the crisis of 2008-2009, differences are now emerging again, limiting the G20’s possibilities.
- There must be a sensible compromise accommodation between the US and China over their differences on the strength of the Chinese currency, the renminbi.
Coordination is essential to tackle continuing and growing monetary problems. Its absence, amid continuing imbalances between deficit and surplus countries, could well bring serious trouble for the global economy. The G20 agreements during the financial crisis of 2008-2009 were crucial to ending the emergency situation, but fundamental differences between many member countries – especially the US and China – have reduced the G20’s capacity, and perhaps its collective will, to action. It could, however, still provide the framework for a process of coordination of financial policies.
There has to be a forum where currency issues are discussed. The IMF, half-dead two years ago, has been resurrected as a critical institution. Cooperation is needed under an institution that is credible, but the IMF is still rooted in the past with little representation of major emerging economies like China, Brazil and India. At the request of the G20, it is working on domestic reforms for countries at various levels of economic development that would fit into an overall programme of monetary reorganization. Nevertheless, perhaps some new structure would be more appropriate.
“A proliferation of new mechanisms” could only make the situation more complicated. It seems unlikely that the IMF could acquire the power to tell governments how to act on exchange rates. In whatever forum currency issues are discussed, it is unthinkable that “the big guys” would approve sanctions that could be used against them if they failed to observe any agreed rules.
The US dollar, long a totally dominant reserve currency, now accounts for only 60% of world reserve holdings, and that figure is steadily declining. One option is to explore the possibilities for a “supra-national, supra-sovereignty currency”. If established, it would be of huge help in managing the global economy. Special Drawing Rights (SDRs) through the IMF are not seen as a solution, although controls on holdings of dollar reserves and on floating exchange rate mechanisms could be a way out.
The need for international coordination was challenged – governments, especially in the US and China, know what they must do to correct imbalances. The US administration has to introduce strong austerity measures to reduce domestic purchasing power and export more. China has to move to a more household-oriented policy through higher salaries, increasing the purchasing power of the Chinese consumer and thereby encouraging imports. Pressure should be maintained on China to act, but it should be given time to make the needed changes. Another barrier to international cooperation lies in the power of domestic legislatures, which will have to approve any measures agreed.
Other Key Takeaways
The European Union is in the process of creating a continental Monetary Fund, and Asia seems to be moving in the same direction. Countries have to consider what this might mean for the global system and work to avoid contradictions between regional and global systems.
There is a danger of the re-emergence of a two-tier currency system – one open and the other subject to controls of flows. China operates in the second system, and there are signs that other countries, like Brazil, are moving towards it.
An end to the dollar’s role as a reserve currency would be advantageous to the United States. The perceived advantage is in fact a disadvantage.
If the Renminbi were floated now, it would go through the roof.
Herman Gref, Chairman of the Board and Chief Executive Officer, Sberbank, Russian Federation
Jiang Jianqing, Chairman of the Board, Industrial and Commercial Bank of China, People's Republic of China
Christine Lagarde, Minister of Economy, Finance and Industry of France; Member of the Foundation Board of the World Economic Forum
John Lipsky, First Deputy Managing Director, International Monetary Fund (IMF), Washington DC; Global Agenda Council on the International Monetary System
Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago Booth School of Business, USA; Global Agenda Council on the International Monetary System
George Soros, Chairman, Soros Fund Management, USA
C. Fred Bergsten, Director, Peterson Institute for International Economics, USA
This summary was prepared by Robert Evans. The views expressed are those of certain participants in the discussion and do not necessarily reflect the views of all participants or of the World Economic Forum.
Copyright 2011 World Economic Forum
No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of the World Economic Forum.
Keywords: Currency, financial system, United States, China, G20, IMF, deficits and surpluses, European Union
C. Fred Bergsten
Director, Peterson Institute for International Economics, USA
BA (Hons), Central Methodist College; MA in Law and Diplomacy and PhD, Fletcher School of Law and Di...
Chairman of the Board and Chief Executive Officer, Sberbank, Russian Federation
1990, graduate with diploma in Jurisprudence, Faculty of Law, Omsk State University. 1997-98, Vice-G...
Chairman, Soros Fund Management, USA
1952, graduate, London School of Economics. Founder: 1979, Open Society Fund; 1984, Soros Foundation...
Managing Director, International Monetary Fund (IMF), Washington DC
Degrees, Institute of Political Studies, and Law School, Paris X University; postgraduate diploma in...
Senior Fellow, Foreign Policy Institute, Johns Hopkins School of Advanced International Studies (SAIS), USA
PhD in Economics, Stanford University. 1974-84, with the International Monetary Fund (IMF), includin...
Raghuram G. Rajan
Governor of the Reserve Bank of India (RBI)
Economic Adviser to Prime Minister of India; 2003-06, Economic Counsellor and Director, Research, In...
Chairman of the Board, Industrial and Commercial Bank of China, People's Republic of China
Graduate, Shanghai University of Finance and Economics; Master's in Engineering and DBA, Shanghai Ji...