With less than a year after slow recovery from 2007-08 economic recession, the world seems to be gripped by another wave of economic downturn. This economic downturn appears to have begun with the debt crisis in Greece in particular and euro zone in general which started to show its impact on global economic situation since last year. Greece’s sovereign debt problem has been followed by other members of European Union like Ireland, Portugal, Italy and other members which are also part of euro zone.
Even Germany and France, the two major countries in European Union are not untouched by the current economic slowdown and this is why Nicolas Sarkozy, the French President and the German Chancellor Angela Merkel convened a mini European Union summit recently to coordinate their economic policies. Following that high level meeting they have talked about a new economic government for the euro zone with much more central control of member-states budgets.
The above mentioned Sarkozy-Merkel mini summit, among other things, set out plans as part of major moves to synchronize tax and spending jolting Euro Zone. They have lent support to Tobin Tax, a financial tax on all international transactions, to raise funds to ease the crisis engulfing the European economy. The European Union members have expressed concerns that previous bail out of crisis-hit Greece has not overcome the problem. Their worries are on increase due to the possibility of Greece-like contagion spreading among European Union members.
The lowering of America’s credit ranking displaying the world’s number one economy’s weakness and loss of credibility has also contributed to global economic downturn. The growing trade deficit of the U.S. especially with China has created a situation of increasing dependency of the former upon the latter. The U.S. has now become the largest borrower from China, whose investment in U.S. Treasury Bonds has crossed the mark of trillions. Nonetheless, in terms of the size of America’s contributions to global GDP, the U.S. economy is still regarded as the world’s largest one and its replacement by rising China may take many years if not decades.
The bitter wrangling that dominated the American Congress in the recent months on limit of debt ceiling so that the country could ease its debt problem and resultant delayed agreement among members of Democratic and Republican party has averted the prospects of first default in 224-year history of America. Notwithstanding this the new U.S. budget legislation signed by President Barack Obama on August 2, 2011 has negatively impacted on U.S. economy seen in the falling value of dollar and conversely the shooting up of the price of gold. Consequently, the share value of U.S. companies has plummeted sharply which is an evidence of the weakening of the American economy.
Against this pessimistic background a few observations of Berry Eichengreen, Professor of Economics and Political Science in the University of California, Berkeley are worth-pondering. In his most recent book “Exorbitant Privilege: The Rise and Fall of the Dollar” Professor Berry Eichengreen attempts to analyze the future of dollar as an internationally-accepted global reserve currency. In asking a question like “What can replace the dollar?” he suggests that with Central Banks seeking alternative to Dollar and Euro, it may be an opportune time to expand Special Drawing Rights (SDRs), instrument of the International Monetary Fund.
Special Drawing Right is an international reserve asset created by International Monetary Fund (IMF) in 1969 to supplement the existing official reserve of member countries. It is not to be regarded as liability on IMF and an allocation of SDR does not increase the Fund’s resources available for lending. SDR is included in member countries’ international reserves and members can also voluntarily exchange SDRs for currencies among themselves. Such IMF instruments can be used to exchange freely-usable currencies like dollar, yen, euro and pound sterling. SDRs are allocated to member countries in proportion to their IMF quotas. The IMF uses SDRs as its unit of account and so do some other international organizations. SDR’s value is based on a basket of key international currencies.
In view of such importance attached to SDRs, low-income countries like Nepal can benefit from a SDR allocation, which has received a boost in the wake of 2007-08 global recession. When the world leaders assembled at London in April, 2009 under the aegis of G-20, they decided to strengthen the international economic institutions like the IMF, the World Bank and European Central Bank (ECB). It was after that G-20 Summit which included world’s leading (G-8) and emerging economies like China and India, among others, that the IMF’s quotas were increased enabling the multilateral organization to come to the rescue of troubled countries more efficiently and effectively.
It is in light of the above reality that David Bosco in Foreign Policy argues that surprisingly global economic crisis has strengthened key international institutions. In his opinion the most apparent beneficiaries of this new scenario have been the multilateral organizations viz IMF, ECB and European Financial Stability Facility. In support of this argument Bosco further elaborates saying that leading voices including Prof. Eichengreen and Kemel Dervis have been now articulating that IMF instruments could serve as a new global reserve currency. Mr. Dervis , a former Administrator of United Nations Development Program (UNDP) through his commentary entitled “Small Economies, Big Problems, and Global Interdependence” opines that at the Seoul Summit of G-20 countries in November, 2010, the assembled leaders encouraged the IMF to work with the Financial Stability Forum to develop an early warning system for global financial risks, and to analyze spillover effects on large economies ( China, Euro Zone, UK and U.S.).
Giving new roles to the IMF would result in its increased legitimacy as an institution that is global not only in its membership, but also in its treatment of different types of members: high-income, middle-income and low-income countries (Least Developed Countries). Economic interdependence has become more complex than before and hence IMF’s empowerment in analyzing the macroeconomic and macro-financial risks will be effective to avert economic turmoil.