Reform in the international monetary order

Calls for bold reforms in the current international monetary order are becoming louder and clearer. In a meeting held in the southern Chinese island of Hainan, the leaders of Brazil, Russia, India, China and South Africa (BRICS) on 14th April, 2011 again emphasised the need to revamp the global monetary system that would rely less on the US dollar and give more voice to the emerging-market powers in managing the international financial institutions.
The recent financial crisis, they argued, had exposed the inadequacies of a monetary order, which has the dollar as its linchpin, and pointed to the need of "a broad-based international reserve currency system providing stability and certainty." Chinese President Hu Jintao said that "the world economy is undergoing profound and complex changes. The era demands that the BRICS countries strengthen dialogue and co-operation." In another dig at the dollar, the development banks of the five BRICS countries agreed to establish mutual credit lines denominated in their local currencies, not the US dollar. The head of China Development Bank even agreed to lend up to 10 billion yuan to fellow BRICS and his Russian counterpart stated that he was looking to borrow the yuan equivalent of at least $500 million via the CDB.
The global role of the Special Drawing Right (SDR), the IMF's accounting unit and reserve asset, was also reviewed but the leaders of BRICS stepped around the issue of whether the yuan should also join the SDR, saying only that they welcomed discussion of the composition of the SDR's basket of currencies. As of now, the SDR comprises the dollar, the euro, the Japanese yen and pound sterling. BRICS nations were reported to be split on whether the Chinese currency, which cannot be freely exchanged except for trade and investment purposes, even met the criteria of being part of the SDR. Though China appeared to be keen to have a more diverse global monetary order, it gave no indication that it was ready to make the yuan freely tradable and dismantle capital controls as a price for the prestige of being part of the SDR.
We feel that, in a not-too-distant future, the reality has to be recognised that the world economy has witnessed a sea change since 1944, when the Bretton Woods institutions were set up to govern the international monetary and finance regime and the system must now be comprehensively reformed to adequately reflect the changing economic realities in order to devise a more appropriate response to present and future challenges. What has happened over the last 67 years or so is unique in many respects. The dominant role of the US economy and its currency, so apparent soon after the Second World War has been tested a number of times since then, either due to the failure of the US authorities to meet the expectations thrust on it, or the challenge thrown to it by the other fast-growing economies. The delinking of the dollar with the gold in the early 1970s was a major turning point but increasing the US trade deficit in the subsequent years has put into question the credibility of the US dollar not only as a standard and store of value but as a reserve asset or a preferred mode of exchange. Intriguingly, however, no other instrument or currency has so far stepped forward to fully replace the greenback. The SDR and the later euro were considered as good candidates for sometime but could not attain the required universal acceptability. In the meantime, emerging economies, especially those of BRICS, are making a much faster recovery from economic depression than the developed world. For instance, the Chinese economy has been in such a high gear that it is now estimated to be next only to the US in global ranking and its currency is highly valued all over the world. In a situation like this, it is only natural that BRICS would begrudge the financial and political privileges available to the US that come with being the most dominant power and would also be concerned with the eventual debasement of the dollar due to America's large trade and budget deficits. The Group of Seven industrialised nations, the traditional powerbrokers of the world economy, would of course, try to resist the entry of emerging powers into the big league but ultimately concerns of the countries catching them fast and likely to dominate the economic scene in the future have to be accommodated. We don't know what is going to be the shape and form of the multilateral institutions or the universally accepted currency or instruments for world transactions in the years to come, but the change is imminent. We would urge upon the world community, particularly the developed countries, to accept the reality and initiate preparatory work to reform the international finance system as soon as possible, so that transition is orderly and smooth. In the meantime, China also needs to let its currency find its real value into the market in order to make it fully tradable/convertible so that the yuan could assume its rightful place in the global economy.
Implications of expected reforms in the international monetary order are fairly obvious in the case of Pakistan. Since the country has a relatively large foreign sector, it would like to have a mechanism that would facilitate more trade and reduce protectionism in the developed countries. Also, it would like the major players to develop a medium of exchange and reserve asset that remains more stable over time. We say this because some of the countries have lost in purchasing power by keeping their foreign exchange reserves in particular currencies. However, since Pakistan is only a minor player on the world economic scene, it can hardly influence the decision-making process in this regard but only hope that the final agreement would take due care of its concerns as these, more or less, converge with the aspirations of most of the other countries in the world.