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A Modest Proposal for the G-20

BEIJING – In March, at a meeting in Beijing organized by Columbia University’s Initiative for Policy Dialogue and China’s Central University of Finance and Economics, scholars and policymakers discussed how to reform the international monetary system. After all, even if the system did not directly cause the recent imbalances and instability in the global economy, it proved ineffective in addressing them.

Reform will, of course, require extensive discussion and deliberation. But the consensus in Beijing was that the G-20 should adopt a modest proposal this year: a limited expansion of the International Monetary Fund’s current system of Special Drawing Rights (SDRs). This proposal, while limited in scope, could play an important role in initiating discussion of deeper reforms while helping to restore the fragile world economy to health and achieve the aim expressed in the G-20’s Pittsburgh declaration: strong, sustainable, and balanced growth.

We suggest that SDRs’ role be expanded through new issues and by increasing their use in IMF lending. Doing so would build on the enlightened suggestion made at the G-20’s London meeting in April 2009 to issue SDRs equivalent to $250 billion, which was then quickly implemented. The G-20 could suggest that the IMF issue a significant volume of SDRs over the next three years. We would suggest, for example, an issue of SDR150-250 billion annually (approximately $240-390 billion at current exchange rates).

Such a measure would have several positive effects. First, it would reduce the recessionary bias in the world economy, especially during crises and in their aftermath. Many countries continue to accumulate high levels of precautionary reserves, especially to avoid future crises stemming from reversals on their capital and trade accounts. Recent financial crises have taught countries that those with large reserves are better able to weather the vicissitudes of international financial markets.