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Special Drawing Rights: An idea whose time has come

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8 April 2009 11:57

Anthony Clunies-Ross is Emeritus Professor at the University of Strathclyde and John Langmore is a Professorial Fellow at the University of Melbourne

It is worth expanding a little on Peter McCawley’s comments about Special Drawing Rights (SDRs). The G20 initiative in agreeing to a new allocation of $250 billion of SDRs is a major breakthrough and a dramatic reversal of previous opposition to increasing the volume of SDRs. The importance of the decision is not well understood. This is not surprising because there have been only two allocations before, so it is worth describing the background.

SDRs are a form of money which can be created by decision of the IMF Board, to increase national currency reserves and used as a means of international payment between countries. They were first authorized in 1969 as a means of increasing international liquidity, both by allowing quantitative increases in international reserves and by rendering reserves  more reliable in value through untying them from particular currencies. 

The idea behind them was that a shortage of internationally-liquid assets available to be held in national reserves might oblige countries to restrict demand, with the result that their output would fall below capacity. Various countries that were in this position would aggravate the situation for one another. Extra liquidity might be needed for the world economy to produce at its full potential. 

There have so far been two rounds of creation of SDRs, each spread over three years, the last completed in 1981. Each round must be approved by the Board of Governors of the IMF (in which all member governments are represented) by an 85% majority. Under the weighted-voting system, the majority required means that a small number of industrial countries, or indeed the US alone, can veto any new creation. Through the 1980s, it was the opposition of Germany, Japan, the UK and the US that ruled out any further allocations, in spite of the fact that the representatives of almost all the rest of the world were in favour. 

Since 1958, well before SDRs came into being, there have been recurrent suggestions for using the international creation of liquidity as a source of international aid. The idea was endorsed by a vote of the UN General Assembly in 1980. 

The idea that additional funds for development and for helping to fulfil such global objectives as the Millennium Development Goals could be generated by resuming SDR creation was floated by the Zedillo Panel in its report to the UN Secretary-General in 2001. The Panel argued that this would also tend to reduce the demand for US dollar holdings and thus discourage the indefinite increase of US short-term debt. We organised a small conference on behalf of the UN and other organisations which was held at the Rockefeller Centre in New York City in May 2003 at which the idea was fully discussed and interest strengthened.  

Expansion of the SDR stock touches the US closely because of the prominence of US dollar holdings among existing reserves. Cutting the world’s dependence on dollar reserves reduces Americans’ access to a deepening well of cheap credit.

Clearly the creation of additional SDRs has substantial benefits: it facilitates expansion of economic activity and international trade, especially in countries with current account deficits, and it builds access to an alternative form of reserve currency. A further major step to increasing their value would be for high-income countries to allot their future receipts of SDRs to an agreed fund for use in global public-goods and social and economic development. 

Photo by Flickr user London Summit, used under a Creative Commons license.

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