The International Monetary System and Economic Development

The major international financial crises of the past decades have shown that the international monetary system that evolved in an ad hoc way after the collapse of original Bretton Woods arrangements in the early 1970s must be reformed in a comprehensive way. This is particularly important from the point of view of emerging and developing countries, which are subject to strong boom-bust cycles in external financing, must “self-insure” to the associated risks through the accumulation of large foreign exchange reserves, severely face the inadequacies of the crisis management facilities currently available, and have inadequate voice and participation in the governance of the system. On the basis of an analysis of the system, this chapter proposes reforms in seven areas: (i) a better international reserve system than the current fiduciary dollar standard, and particularly one that makes counter-cyclical allocations of IMF’s Special Drawing Rights (SDRs) that increase international liquidity during crises and help fund counter-cyclical IMF lending; (ii) better instruments to guarantee the consistency of national economic policies of major countries; (iii) a system of managed exchange rate flexibility that promotes stability and avoids negative spillovers on other countries; (iv) the regulation of cross-border finance to mitigate the pro-cyclical behavior of capital flows; (v) appropriate balance of payments financing during crises, particularly through financing facilities that are automatic or have simpler prequalification processes and simpler or no conditionality, to overcome the stigma associated with borrowing from the IMF; (vi) adequate international sovereign debt workout mechanisms; and (vii) reforming the governance of the system through a more representative apex organization than the current G-20, stronger voice of developing countries in the IMF, and a “dense” architecture, in which the IMF is complemented with regional and interregional institutions.