The Case for Regular SDR Issues: Fixing Inconsistency in Balance-of-Payments Targets
by John Williamson, Peterson Institute for International Economics
Op-ed in VoxEU.org
October 2, 2009
The Special Drawing Right (SDR) was created by the IMF in the late 1960s as its very own gold substitute and first allocated to IMF members in 1970. Subsequent issues in the following two years were agreed at the same time, and then a new three-year period of modest allocations occurred in 1979–81. Despite the laughably ambitious aims for the new asset that were voiced by the Committee of Twenty in 1974, it subsequently went into a deep hibernation from which it was only woken recently as a consequence of the decision of the London G-20 meeting to recommend a $250 billion allocation (Reisen 2009). Together with the call by the governor of the People's Bank of China to consider creating enough SDRs to allow countries like China to diversify some of their dollar holdings (Zhou 2009), this has rekindled interest in assessing whether the SDR could play a useful role in reforming the international monetary system to fit it for today's world (Rodrik 2009).
Lots of difficult and ambitious reforms of the SDR, such as making it an asset that the private sector would be allowed and anxious to hold, are periodically proposed (Aiyar 2009). This column, based on a longer piece, does not presume any of these reforms. It merely argues that the world would be a better place if a substantial portion of the demand for holding additional international liquidity were to be met by creation of more SDRs instead of exclusively by expanding reserve currency holdings, as in the recent past. (By a "substantial portion" I mean perhaps half, which—to judge by the additions to reserves in the period 2002–06—would imply SDR allocations of over $400 million per year; see Williamson 2009 for details.)
There are four differences in satisfying the increased demand to hold reserves by allocating SDRs rather than permitting countries to hold increased quantities of reserve currencies, which means principally dollars.
Most of us can think of other reforms to the international monetary system that we would like to see. But it is quite difficult to think of other reforms that promise equally profound benefits to the world and that demand so little in the way of change. SDR allocation involves merely making use of what already exists, not making big and difficult reforms. Yet grasping this opportunity offers the surest way of reducing the inconsistency in payments objectives that currently looks to be the biggest obstacle to a strong recovery in the global economy in the post-Lehman world.
Aiyar, Anklesaria (2009). "An International Monetary Fund Currency to Rival the Dollar?" Washington: Cato Institute.
Humpage, Owen F. (2009), "Will special drawing rights supplant the dollar?" VoxEU.org, 8 May.
Reisen, Helmut (2009), "Shifting wealth: Is the US dollar Empire falling?" VoxEU.org, 20 June.
Rodrik, Dani (2009), "Why Don't We Hear a lot More About SDRs?" Debate: Macroeconomics, a Global Crisis Debate, VoxEU.org, 4 February.
Williamson, John (2009), "Why SDRs Could Rival the Dollar", Peterson Institute Policy Brief, Number 09-20.
Zhou Xiaochuan (2009), "Reform of the International Monetary System". Beijing: People's Bank of China.