Emerging Market Economies and the Reform of the International Financial Architecture: The “Exorbitant Privilege” of the Dollar Is Only the Symptom of a Structural Problem

The developed world’s policy response to the recent financial crisis has produced a growing chorus of criticism of the international financial system by emerging market government officials, related to the currency wars generated by the extraordinary monetary policies introduced by developed country central banks in response to the Great Recession. The proposed solutions to this developments, like increased policy coordination, replacing the dollar with an international reserve currency, and the creation of regional institutions to replace the US-dominated International Monetary Fund, not only have gained little support in the past, they are unlikely to remedy the faults decried by emerging market economies. We suggest that several of the alternatives rejected in the pre-Bretton Woods discussion, like compensation unions, could provide a basis for a more stable financial system suitable to the needs of emerging market economies.