Published on The Telegraph.co.uk, by Edmund Conway, Sept 7, 2009.
You might not have heard about the United Nations Conference for Trade and Development before. But this wing of the UN has just produced what I think may well be the most important document on economic policy since the great financial crisis of the 2000s …
… But even more interesting is what it has to say about remodelling the world’s monetary system.
Here perhaps it’s best for me to point you towards my news story and to paste in part of the press release (long, but really worth reading):
- The TDR 2009 also points to the weakness of an international reserve system that uses a national currency as a reserve asset. Such a system always depends on monetary policy decisions by the central bank that issues that currency, decisions that are taken according to national policy needs and preferences; they do not account for the needs of the international payments system and of the world economy. Another disadvantage of such a system is that at times of current account disequilibria it imposes the entire adjustment burden on deficit countries. The IMF has reinforced this deflationary bias by imposing restrictive policies on deficit countries as part of its loan conditions, rather than pressing surplus countries to carry out more expansionary policies. Only deficit countries that issue a reserve currency, as the United States, are under no obligation to adjust to growing current-account disequilibria.
- But neither capital account management, nor a new international reserve currency will solve the main problem confronting many countries, in particular emerging-market economies, in a world with a high degree of financial integration: the problem of exchange-rate management. It is not possible for a country to absorb external shocks efficiently by adopting either entirely flexible or rigidly fixed exchange rates, UNCTAD economists argue in the report. They therefore suggest that countries should adopt a system of managed flexible exchange rates. This system would target a real exchange rate that is consistent with a sustainable current-account position. Since the exchange rate is a variable always involving at least two currencies, there is a much better chance of achieving a stable pattern of exchange rates in a multilaterally agreed framework for exchange-rate management.
UNCTAD argues that a new monetary system based on multilaterally agreed principles and rules is needed for macroeconomic stability in the globalized economy and for a level playing field for international trade. The report points to the importance of stabilizing real exchange rates at a sustainable level. Such a system would go a long way towards reducing the scope for speculative capital flows that generate volatility in the international financial system and distort the pattern of trade. A stable real exchange rate (RER) at a competitive level would achieve a number of targets simultaneously:
- It would curb speculation, because the main trigger for currency speculation is inflation and interest rate differentials, which would be compensated for by changes in nominal exchange rates.
- It would prevent currency crises, because the main incentive for speculating in currencies of high-inflation countries would disappear, and overvaluation, one of the main destabilizing factors for developing countries over the past 20 years, would not occur.
- It would prevent fundamental and long-lasting global imbalances and avoid subsequent debt traps for developing countries.
- It would avoid procyclical conditionality attached to International Monetary Fund (IMF) supported stabilization programmes, such as cutting government expenditures and raising interest rates. Countries facing strong depreciation pressure could automatically receive financial assistance through swap agreements or through symmetric intervention by countries facing the corresponding appreciation pressure.
- It would reduce the need to hold international reserves to defend exchange rates and could be combined with a stronger role for special drawing rights (SDR), if allocations are made in light of a country´s need for international liquidity to stabilize its real exchange rate at a multilaterally agreed level.
Such a multilateral system would tackle the problem of speculation and destabilizing capital flows at its source, the TDR says.
The system sketched out by the UN amounts to nothing less than the most radical overhaul of the world’s economic structures since Bretton Woods in 1944. It would effectively kill off the vast swathes of the financial system which thrive on currency arbitrage and trading. Many people (particularly after the crisis) would say this is no bad thing.
The problem is that as interesting as this is, I fear the proposal has come too late (this time around). Unless there is a massive further dive in economic output next year (not to be ruled out), the political will to reform is likely to peter out, particularly as we seem to be in full “green shoots” season. Indeed, earlier today one of the report’s authors acknowledged to me that the window of opportunity for a change has now most probably passed … (full text).