It’s back and in the headlines again, a topic that kept global finance officials busy for much of this year. On Sunday evening, negotiators from 30 countries who form the International Monetary Fund and the World Bank convened in Namibia for meetings that come just after the G-20 group met in Germany. The goal of both organizations is to do more with less – keeping the global economy growing in part by coordinating policy and making economies more competitive.
The nitty-gritty of how the current system works has been the subject of concern for many policy makers around the world. In the United States, the core issue is that the rules for international trade and finance are poorly coordinated, creating unfair incentives for countries to manipulate their exchange rates to benefit their exports, or for countries to manipulate their currencies to give their exporters an advantage on global markets. In theory, countries with freely floating exchange rates can match imports and exports, offering the world a competitive mix of goods and services. More investment by countries which have a currency at a “reasonable” value can ensure strong economic growth. But plenty of countries resort to strict controls or even outright currency manipulation to gain an advantage, undermining the global economy’s long-term performance.
The international monetary system still uses a fixed exchange rate system, meaning the value of the dollar makes a huge difference to how other countries’ currencies behave. It’s one of the reasons why the United States, for example, is facing trade and fiscal challenges, even though GDP is bigger than in most of its trading partners. A properly synchronized international monetary system would reflect the changing economic conditions in the global economy, with exchange rates reflecting the competitive and financial conditions of countries. The IMF also advocates for a more flexible monetary policy. On the international trade front, it backs the idea of zero tariffs, but calls for a more “non-discriminatory” system of world trade that facilitates trade, not shuts it down.
In theory, the current system could be revised – but very simply, it would involve setting up a reserve currency or currency exchange system, known as a SDR. The SDR is a bundle of currencies originally created for the United Nations in 1969. It would be equivalent to gold, whose buying and selling has been regulated for more than a century. The most commonly used SDR is now the dollar. Establishing this SDR would make it the global means of exchange. Countries would then trade with each other in that currency, like they do today with the euro and a host of other currencies.
These rules have not been easy to reform. During the financial crisis in 2008, it took major European countries, China and the United States to drive a hard bargain on exchange rates, co-opting the help of the IMF to coordinate monetary policy. Those negotiations produced the G-20’s “Doha Round” of multilateral trade negotiations, the only major attempt to reform the international financial system over the past decade.
Yet the IMF’s work in managing world trade and currencies – and the inequities in the current system – has given rise to an anti-IMF movement that seems to have broad support. One of the main things to understand about the international policy-making process is that it is not wholly determined by any government, nor even by a committee. Even so, it is composed of countries whose interests are often sharply opposed. The idea that the IMF is the most powerful global economic actor has been challenged by the loudest critics, who have made reform difficult. Once more, the IMF will have to find ways to satisfy its critics in how it implements the work of the G-20, and makes progress on international trade and currency reform.