Re: Stiglitz on Global Financial Reform

[Gunnar Tómasson <gunnar.tomasson@xxxxxxxxxxx>]

Re. the following:

> Stiglitz proposes the creation of new "global greenbacks" without
> making clear how they differ from the existing special drawing rights
> (SDRs) under the IMF.    He justifiably criticizes the IMF, yet
> doesn't explain how this new global greenback will be created and
> administered.  I'd appreciate any clarification on this.

Comment:

1.  As conceived in the late 1960s, the SDR scheme was envisaged as a means
of ensuring an adequate supply of "international liquidity" in the face of
concern that the U.S. balance of payments position would turn from deficit
to surplus.

2.  Accordingly, SDR "allocations" (newly created SDRs) were distributed
among IMF members in proportion to their respective IMF Quotas.

3.  In principle, periodic SDR "allocations" were contingent on a finding by
the IMF that the supply of "international liquidity" needed to be
supplemented lest inadequate supply thereof would constrain the growth of
world trade.

4.  In due course, the increase in "international liquidity" generated by a
persistent U.S. balance of payments deficit after the early 1970s made it
difficult to justify any such "finding" insofar as most Developed Countries
among IMF members were concerned, with the Less Developed Countries taking
the contrary position.

5.  As a result, new SDR "allocations" were effectively suspended for a
period of time.

6.  However, when the former communist countries of Eastern Europe joined
the IMF, a decision was made to make a new SDR "allocation" for their
exclusive benefit in a departure from the original practice of "allocating"
SDRs in proportion to the Quotas of all IMF members.

7.  With this important change of principle, the IMF membership effectively
embraced the idea that SPECIAL circumstances may warrant departure from the
original rules of the game insofar as SDR "allocations" are concerned.

8.  In this context, Stiglitz' proposal is predicated on the proposition
that recent and prospective trends in the World Economy represent SPECIAL
circumstances to which the international community can and should respond
appropriately.

9.  The process of translating this original idea into practice is at both
political and technical - given political will, the technical details can
readily be worked out.

Gunnar



----- Original Message -----
From: "William F Hummel" <wfhummel@xxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>
Sent: Tuesday, July 29, 2003 5:20 PM
Subject: Re: Stiglitz on Global Financial Reform


> Gunnar Tomasson wrote:
>
> >In his article below, Joseph Stiglitz makes an imaginative proposal for
SDR creation by the IMF.
> >
> >Stiglitz did not spell out the "details" of how his proposal might be
implemented.
> >
> >As and when these were worked out, the proposal might become the
cornerstone of an integral world-wide economic reconstruction effort, with
newly-created IMF SDRs absorbing the external financing impact of public and
private sector investment projects across the globe.
>
> Stiglitz proposes the creation of new "global greenbacks" without
> making clear how they differ from the existing special drawing rights
> (SDRs) under the IMF.    He justifiably criticizes the IMF, yet
> doesn't explain how this new global greenback will be created and
> administered.  I'd appreciate any clarification on this.
>
> Stiglitz condemns the huge US trade deficit, but notes that:
> "The arithmetic of global trade implies that the sum of all trade
> deficits equals the sum of all trade surpluses.  This means that one
> country's deficit is another country's surplus.  If some countries,
> like Japan and China, insist on running surpluses, then other
> countries must run deficits.  Thus deficits are as much the fault of
> surplus countries as they are of deficit countries."
>
> As I have been arguing, the US trade deficit is not _caused_ by
> excessive borrowing from foreign trading partners.  Rather it is the
> inevitable result of their policies to promote trade surpluses for
> domestic reasons, including actively supporting the exchange rate of
> the dollar vis-a-vis their own currencies.
>
> Stiglitz goes on to say:  "If every country tried simultaneously to
> cut back on their trade deficits, but no pressures were imposed on the
> surplus countries, earlier fears of a deflationary bias in the global
> economy would be realized."
>
> Indeed, if the US created effective barriers to imports in an effort
> to reduce its trade deficit, the result would likely be a serious
> world-wide depression.  Other countries without exception complain
> about the US trade deficit because of the effect it may have on the
> exchange value of the dollar and thus the value of their own
> dollar-denominated assets.  Yet no country appears willing to revise
> its policies to reduce its bilateral trade surplus with the US.  I am
> well aware that the US also actively protects some of its industries
> with tariffs or subsidies, but the aggregate result is obviously in
> favor of those exporting to the US.
>
> Stiglitz proposes some sort of an international body, a World Court,
> that would administer cases of sovereign bankruptcy with the object of
> providing work arounds that don't impose excessive demands on the
> economy of the bankrupt nation.  While this is laudable, I find it
> somewhat unrealistic.  To make it less so, he needs to be far more
> specific on how it would be implemented.
>
> Finally, it seems to me that there are many nations that simply don't
> have the institutions necessary to make proper use of the funds that
> Stiglitz would provide through his new "IMF".  This is  particularly
> true of those nations in which autocratic rule has been the norm, as
> in much of Africa, South America, southeast Asia, and the middle East.
> Financial rescue packages in those regions have often simply ended up
> in Swiss bank accounts and lavish lifestyles for the autocrat and his
> retinue.  Stiglitz needs to address this problem and not lump the
> countries together as if they were all well-behaved partners in his
> grand scheme.
>
> William F Hummel
>
>