PRINCETON – The international system of economic governance is at a turning point. After 70 years, the Bretton Woods institutions – the International Monetary Fund and the World Bank –appear creaky, with their very legitimacy being questioned in many quarters. If they are to remain relevant, real changes must be made.
The IMF, in particular, is facing challenges on all sides. In the United States, Congress is stalling not only on international issues like trade, but also on the implementation of reforms that would expand the role of emerging economies in the IMF. For its part, Europe has drawn the organization into its debt crisis, with Greece having already missed a payment on its IMF loans (though the Fund is not calling it a default). And, in Asia, the IMF still carries a stigma, because of its flawed response to the region’s financial crisis in the late 1990s.
How can the IMF reprise its role as a guardian of international financial stability? One solution could be to adjust its international reserve asset, the Special Drawing Rights (SDR), by adding the Chinese renminbi to the basket of currencies that determines its value.
The SDR was created in 1969 to help protect the world against the dangers of a liquidity shortage. At first, its value was equal to that of the US dollar, which was defined in terms of a specific weight of gold. But when US President Richard Nixon ended the dollar’s international convertibility to gold in 1971, much of the world moved to a floating exchange-rate system in which the value of any given currency can fluctuate wildly.