Re: global chartalism and/or Stiglitz?

[g kohler <kohlerg@xxxxxxxx>]

Henry C.K. Liu wrote 14 April 2002:
"Stiglitz proposal is a non-starter.  The key monetary injustice facing
the emerging economies is the tyranny of an external currency, against
which the currencies of these economies must measure their exchange
value. The IMF SDRs are a mere front for dollar hegemony.  It is not a
replacement of the dollar."
.. . .snip>

GK: Thanks for commenting. I think you may have overlooked that the
Stiglitz proposal is not necessarily linked to, or predicated on, SDRs.
Stiglitz writes (from the full text, attached below):

"There are a variety of institutional arrangements by which these global
greenbacks could be issued. The IMF (responsible for issuing SDRs) could
issue them, or a new institution could be created to decide on quantity
and allocations." (my emphasis)

Nothing prevents the imagination from imagining that this allocation
could be in a post-Keynesian horizontalist manner, benefitting
sub-Saharan Africa more than Canada, etc.

About your own position  (which I would describe as a
delinking-from-the-US-dollar strategy) - I think your position makes
sense for a large country like China (as it did for the Europeans as a
group), but is not suitable for Costa Rica, Mozambique, Vanuatu, or
Canada - they just don't have enough political or market power to
enforce that position.

Gernot Kohler
Oakville, Canada

for reference, the Stiglitz text:
_____________________________
The Economic Times  Friday, March 22, 2002

Global greenbacks
JOSEPH E STIGLITZ

If wars, as Clemenceau famously said, are too important to be left to
generals, development is too important to be left to finance ministers,
central bankers, the IMF and World Bank. This week's gathering on
"Finance for Development" in Monterrey, Mexico is a perfect opportunity
for other concerned players, including Presidents and prime ministers,
to assert their interests.

The international community has agreed on a set of modest goals for
global development - reducing poverty and illiteracy and improving
health. But this requires a substantial increase in assistance at a time

when the paltry levels of aid provided by rich countries continue to
fall. The US, the world's richest country, is the stingiest. As long as
the world's advanced countries maintain this attitude, innovative
approaches to financing economic development need to be tested.

One idea receiving attention is a new form of global money akin to the
IMF's Special Drawing Rights (SDRs). SDRs are a kind of global money,
issued by the IMF, which countries agree to accept and exchange for
dollars or other hard currencies.

The underlying idea is simple: every year, countries around the world
set aside reserves as insurance against contingencies such as an abrupt
downturn in foreign lenders' sentiment or a collapse of export prices.
As a result, some global income sits around rather than financing
investments that poor countries need. The amounts held in reserves are
huge - roughly $1.6 trillion world-wide. Countries like to keep their
reserves growing in tandem with growth in imports and other foreign
liabilities. If these liabilities grow by 10 per cent annually,
countries need to set aside an additional $160 billion.

Countries hold these reserves in a variety of forms, including gold and
US Treasury bills. While America benefits from increased demand for its
Treasury bills (which reduces borrowing costs), developing countries
receive a return of just 2 per cent - essentially zero in real terms.
Investments at home may offer much higher returns, but foregoing them is

the price developing countries pay for a safe hedge against the pitfalls

of global capitalism.

Instead of holding their reserves in dollars, a new form of global money

- "global greenbacks" - could be issued which countries could hold in
reserve. The money would be given to developing countries to finance
their development programmes as well as global public goods like
environmental projects, health initiatives, humanitarian assistance, and

so on.

There are a variety of institutional arrangements by which these global
greenbacks could be issued. The IMF (responsible for issuing SDRs) could

issue them, or a new institution could be created to decide on quantity
and allocations. A new institutional arrangement might entail the
creation of a set of trust
funds - say, for education or health, or the environment - with
competition among countries for projects helping to promote these
objectives. For countries that receive less than the amount that they
need to put into reserves, the new "global money" would go into the
reserves, freeing dollars that these countries would otherwise set
aside. Countries that receive more than they must put into reserves
could exchange
the new money for conventional currencies. Eventually, all the new money

will wend its way into reserves, which in effect represent a commitment
by countries to help each other in times of trouble. A country with
reserves of the new global money could exchange it for hard currencies
to sustain needed imports.

There is another major advantage. The arithmetic of global trade implies

that the sum of all trade deficits equals the sum of all trade
surpluses. If some countries, say, Japan and China, insist on running
huge surpluses year after year, then other countries must run deficits.
The deficits are as much the fault of the surplus countries as they are
of the deficit countries. Now, trade deficits are like hot potatoes.
Nobody wants them, so they get passed around. If one country gets rid of

its deficit, it must show up elsewhere. Uncertainty about whether these
deficits can be financed is one reason why the world economy, under
current arrangements, faced a succession of crises in recent years.
Issuing the new global money would reduce this uncertainty. If a
developing country's trade deficit is offset by assistance through a
grant of the new global money, its overall financial position will be
secure. Of course, even with this assistance, countries that mismanage
their economies will face problems; the proposal is not a panacea to the

world's problems. Nor would this scheme be inflationary. Global
greenbacks would offset the deflationary bias in today's arrangements
that result from the fact that part of the income set aside as reserves
never gets translated into global aggregate demand.

Relative to global income - some $40 trillion - the magnitude of
monetary growth would be minuscule. Relative to today's levels of
spending on official development assistance and global public goods,
however, the amounts are enormous. The scheme also provides regular
funding, not currently available, to finance global public goods.
Commitment to participate in the programme would, presumably, be long
term.

The scheme will not require the support of every major developed
country. This is important because the US might oppose any plan that
undermines demand for Treasury bills (and thus its guaranteed access to
low-cost financing). But if most advanced countries were to recognise
this new form of global
money, they could put pressure on holdouts by limiting their holdings of

non-participant currencies and treasury bills in their reserves.

Innumerable details must be worked out before a global money scheme
could be put into practice, and changes will not occur overnight. But
the Monterrey meeting provides an opportunity for such ideas to be
discussed and vetted. This much is clear: addressing the plight of the
world's poorest countries
and providing the global public goods needed in this age of
globalisation requires us to explore innovative ways of raising the
necessary financing.

What makes the global greenback proposal attractive is that it provides
the funds poor countries need while contributing to global economic
growth, stability, and equity.

(The author is Professor of Economics at Columbia University)
Project Syndicate, March 2002

Copyright © 2002 Times Internet Limited. All rights reserved.





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