Instabilities in the IMS: Prospect of SDR as Stabilizing Tool
The international monetary system (IMS) has arrived at a crossroads, as dangerous imbalances in the IMS are largely due to the dollar's privilege as the most used currency in international trade and investment. The idea of Special Drawing Rights (SDRs) replacing the USD as de facto international reserve currency has gained significant support. Though the list of SDR-weaknesses is abundant, a difficult transition towards its use as a proxy is a necessary alternative to an IMS collapse.
Detrimental instabilities in the current paradigm have existed in the core of the IMS ever since the Bretton Woods system, but the global economic conditions have dramatically changed due to globalization and technological improvements. Consequently, a comprehensive reform is needed in order to shift further from the Triffin Dilemma, which exacerbates the existing instabilities in the IMS through the need to accumulate reserves, protect against volatile capital flows, insufficient adjustment mechanism and external imbalances. An ambitious resurrection of the SDR as a potential tool to initiate the IMS reform has gained a great deal of attention. The international community is growing increasingly bitter towards the unavoidable dollar-standard; hence the current attitudes may in fact provide the IMF an opportunity to present the SDR as a potential solution. Therefore, this paper examines the current instabilities in the International Monetary System and studies whether the Special Drawing Rights can become a new dominant reserve currency to facilitate global economic activities.
Several prominent world leaders and thinkers have proposed the idea of a more representative currency instrument, which would address the current imbalances. The idea of SDRs replacing the U.S dollar as de facto international reserve currency has gained significant support. Adopting a synthetic global currency that would be based on a basket of existing currencies and operated by the IMF could, in theory, gradually end the world's dependency on the dollar anchor in international trade and investments. By expanding the quantity of SDRs in circulation, central and commercial banks would gradually have a larger incentive to hold such an instrument. A more stable and safe global asset could produce greater stability in exchange rates and also facilitate the correction of large imbalance in the IMS.
We can expect the IMS to move towards a system where multiple reserve currencies operate in their regions. However, the dollar is likely to remain at the top of the pyramid, facilitating the distribution of economic power. However, the success in global collaboration requires the participation of all major stakeholders of the IMS. Therefore, leading countries may have to embrace more responsibilities in restructuring the IMS using IMF and the SDR as a proxy and comprehensive synthetic financial instrument. The transition period will be difficult and full of mechanical difficulties. However, that will be a small price to pay in order to avoid a total collapse of the IMS.
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Henri Erti is currently a research associate at the Ludwig von Mises Institute-Europe and volunteers as a political analyst at the European Student Think Tank. He holds a BA in Business and Organizational Leadership from Brevard College and MA in International Political Economy from Dubrovnik International University.