Stephanie BlankenburgUNCTAD

1. Key functions of an IMS2. Briefest of histories of modern IMS3. Current challenges from a developmental

perspective4. Ways forward: The ideal solution and viable

alternatives

Øto provide international liquidity to the global economy required for balanced productivity and employment growth/expansion across economiesØNot only macroeconomic and financial stability (stable

exchange rates, sustainable current account positions, orderly adjustment to external shocks)

Øto balance international policy co-ordination with the need for national/regional policy space to respond to different challenges at these levels

Ø to support the financing of structural transformation through:Ø Long-term access to foreign demand (reliable export markets) to support

domestic “profit-investment nexus” and repay external debtØ Systematic ‘recycling’ of the surpluses of high-productivity economies to

lower-productivity developing economies (expansionary policies ‘at home’ to stimulate domestic demand for imports from developing economies, productive FDI in developing economies, lending on ‘reasonable’ commercial and/or concessional terms)

Ø to sustain significant macroeconomic imbalances that support domestic development strategies and generate export earnings to pay off external debt

Ø In a ‘hyper-globalized market’ economy (floating exchange rates, open capital accounts) there is no spontaneous mechanism to ensure a development-friendly IMS (of global ‘trade-money nexus’) emerges

} The Gold Standard Period (1880-1913)} The Interwar Period (1919-1939)} The Bretton Woods Period (1944-1971)} The Neoliberal Period and Hyper-

Globalization (1970s – now)

} Price Specie Flow Mechanism: Automatic adjustment of ‘external balances’ (minimal movement of reserves) by making preserving official parity between local currency and ‘gold’ a policy priority under conditions of free convertibility

} Efficient at ensuring external balances are kept} Deficit countries bear the burden of adjustment} Competition for limited gold reserves: Restrains

economic growth and leads to adoption of overly restrictive economic policy regimes in deficit countries (“austerity”)

} Limited world supply of gold that ties global liquidity (or money supply) to the production of a commodity.

} Political will of leader nation to play role of “lender of last resort”

} Worst example of international financial disintegration pre-2007 accompanied by attempts to go back to the gold standard

} WW I: BoP deficits especially in the UK leading to suspension of the gold exchange standard in 1931

} Britain’s role as leader nation goes into gradual decline} Short supplies of gold} Increasing financial and economic instability with short-

term financial funds moving fast from one financial centre to another

} Great Depression 1929-32: Deflation, that is,a general fall in prices due to tighter money supply, falling profits, rising unemployment and a steep decline in aggregate demand.

} Fixed but adjustable peg (exchange rate) system

} Capital controls combined with flexible use of domestic policies◦ Recognition of ‘Trilemma’: the impossibility to

simultaneously pursue more than two of three objectives of liberal capital markets, fixed exchange rates and an independent monetary policy

} GATT (1947 Havana Conference): Liberal trading system geared towards full employment

} International BoP adjustment mechanism:◦ IMF: ‘lender of last resort’ for short-term stabilisation◦ Deficit countries: forced to adopt deflationary measures◦ Surplus countries: pursue import stimulating expansion or invest

abroad (scarce currency clause – weak sanction of surplus accumulation through piling up international reserves or investing surpluses in international financial markets)

◦ Member that perceives its BoP to be in fundamental disequilibrium can request the IMF to sanction a change in the members’ par value.

◦ Maintenance of international reserves through quota contributions by member states of their own currency and gold to an IMF fund

} International BoP adjustment mechanism◦ World Bank: long-term investment funds for post

war reconstruction and� “to develop the resources and productive capacity of

the world with special attention to the less developed countries, to raise the standard of life and the conditions of labour everywhere, and so to promote and maintain equilibrium in the international balance of payments of all member countries.” (John M. Keynes)

} World trade grows at 7.5% p.a.} Extensive trade liberalisation under GATT} Some developing countries arguably benefit indirectly

from trade liberalisation via rapid growth in industrialised centres

} International capital flows slow down overall} Dominated by direct government and multinational

institutional investment abroad (official aid and loans), also to less-developed countries

} Long-term FDI dominates short-term capital flows} Overall growth performance the best in modern times

“It is tempting to look at the market as an impartial arbiter […] But balancing the requirements of a stable international economic system against the desirability of retaining freedom of action for national policy, a number of countries, including the US, opted for the latter [….] A controlled disintegration in the world economy is a legitimate objective for the 1980s.”(P. Volcker 1978 quoted in Varoufakis, The Global Minotaur, 2011: 100)

} “Today's Fund [IMF] is only 2 per cent of annual world imports. The difference between Keynes's originally proposed 50 per cent and the actual 2 per cent is a measure of the degree to which our vision of international economic management has shrunk.''(H. Singer quoted in T. Weiss, International Studies Quarterly (2009) 53: 253-271 )

} “[a]n international monetary system in the strict sense of the word does not presently exist. Every country has its own system. Most people do not understand how unusual this system is. For thousands of years countries have anchored their currencies to one of the precious metals or to another currency. But in the quarter of a century since the international monetary system [the BWS, S.B.] broke down, countries have been on their own, a phenomenon that has no historical precedent in the cooperative game known as the international monetary system.”

(Mundell 1997: 3)

2.3%

1.3%

-2.1%

-0.9%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2008 2017

% o

f Wor

ld G

DP

Surplus Deficit

17%

38%

18%

43%

29%

16%

36%

3%

0%

20%

40%

60%

80%

100%

2008 2017

% o

f Glo

bal C

A Su

rplu

s

EU (Other)

Selected Commodity Exporters -Developing Economies

China

AE (Other)

DEU/NLD

51%

67.4%

37%

12%

23.5%

9.1%

0%

20%

40%

60%

80%

100%

2008 2017

% o

f Glo

bal C

A De

fricit Selected Commodity Exporters -

Developing Economies

Rest of Developing Economies

EU (Other)

US

Source: UNCTAD Secretariat calculations based on IMF Statistics (BPM6)

Figure 1: Participation in global current account (CA) balances by regions, 2008-2017

} Current account surpluses and deficits reveal strong shifts highly unfavourable to developing countries: ◦ A few high-productivity economies have strongly expanded their relative

shares in global current account surpluses, with few substantive indirect growth effects in developing countries through the latter’s participation in global value chains.

◦ Developing country commodity exporters have turned from surplus into deficit economies following the recent prolonged slump in commodity prices.

◦ Overall, trade deficits – and therefore any net stimulus to global aggregate demand – are now carried by developing countries themselves, alongside the US.

} Since the overall (absolute) size of current account deficits is considerably smaller than a decade ago, including a shrinking US trade deficit, this demand stimulus is much more limited overall, and is further reduced in significance from a developmental perspective, given that the US trade deficit mostly benefits advanced economies, such as the EU, Canada, Japan and Germany, in addition to very few larger developing economies, such as China and Mexico.

Source: UNCTAD Secretariat calculations based on IMF Statistics (BPM6)

Figure 2: Changes in Net International Investment Positions (NIIP) by region, 2008-2016

6.310.9

-8.7-14.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2008 2016

USD

Trill

ions

Positive NIPP Negative NIIP

9%21%

54%

55%

24%

17%

13% 7%

0%

20%

40%

60%

80%

100%

2008 2016

% o

f Pos

itive

NIIP

Selected Commodity Exporters - DevelopingEconomies

China

AE (Other)

DEU/NLD

46%59%

17%

21%

37%

19%

0%

20%

40%

60%

80%

100%

2008 2016

% o

f Neg

ativ

e NI

IP

EU (Other)

Rest of Developing Economies

US

} Regional shifts in net international investment positions (NIIPs), i.e. countries’ external balance of public and private sector foreign assets and liabilities, largely mirror the “winner takes most” trend: ◦ On the net creditor side, the overall strong expansion of

public and private balance sheets between 2008 and 2016 (left-hand side of Figure 2) is driven by steep improvements in the net creditor positions of leading European economies (especially Germany and the Netherlands) as well as reduced liabilities in peripheral Europe, reflecting the EMU’s free-riding focus on exporting its austerity-driven deflation to the rest of the world.◦ By contrast, developing country commodity exporters and

China have seen their respective net creditor roles weakened considerably. Differently from peripheral Europe, the net debtor positions of developing countries and the US have clearly deteriorated.

} In the absence of a functioning international monetary system, core problems arise:(1) Vulnerability of ‘weaker’ (e.g. developing country) currencies to fluctuations in their values; persistent strong demand for the money of advanced economies with well developed financial markets (more advanced national credit money backed by convertibility into other financial assets): This creates persistent divergences in the investment possibilities associated with different currencies.

◦ ‘Weaker’ economies can react by trying to imitate advanced countries financial infrastructures, integrate more closely with advanced country financial markets, or building regional monetary unions.◦ All of these approaches come with a range of

problems (capacity to emulate advanced country financial infrastructures, the failure of the Argentine ‘currency board’ experiment, problems of full monetary union even at EU level)

(2) International reserves today take the form of credit money (i.e. claims on/deposits in international commercial banks), not commodity money (claims/deposits in central banks, backed by convertibility into other commodities, i.e. gold): High degree of international financial integration◦ Such credit money is vulnerable to asset price

fluctuations in international financial markets that affect the real value of debt (that backs the credit money)◦ This undermines the role of (free-floating)

exchange rates as an adjustment mechanism for global imbalances

◦ In a ‘Mundell-Fleming’ world, international adjustment , exchange rate flexibility is central to allow for the adjustment of international imbalances: Deficit countries increase their international competitiveness through currency devaluation, lowering wages (costs), or a combination of the two. ◦ But where international reserves are mostly held in

credit money (backed by debt), such real devaluation will increase the real value of that debt (and lowering this would actually require an overvalued exchange rate).

} The Keynes Plan: The International Clearing Union (ICU)◦ International liquidity provided through contributions by

each member state in their national currencies to their accounts at the international clearing union, denominated in the international currency (bancor).◦ Surplus economies that have spend only part of their

trade surplus would deposit the difference in an account at the international clearing union. The foreign exchange reserves of each member state would remain in their national central bank, but all currency purchases and sales between central banks would be operating through the international clearing union, i.e. accounts held in the international currency.

} The Keynes Plan: The International Clearing Union (ICU)◦ The system would run automatic overdraft facilities

(relative to the size of an economy’s international trade), and loans to deficit countries would not be conditional on adopting specific policy measures (as in today’s IMF). This does not mean that the international clearing union could not intervene at all, but if so, only once the borrower’s initial liquidity needs had been met and structural obstacles to re-payment became an issue◦ Burden of adjustment of international macroeconomic

imbalances is therefore on both, creditor and debtor economies

} The Keynes Plan: The International Clearing Union (ICU):◦ Thus, based on multilateral (as opposed to bilateral)

clearing – “to provide that money earned by selling goods to one country can be spent on purchasing the products of another country” (Keynes 1973, Collected Works (XXV): 270)◦ “[…] the Union can never be in any difficulty as regards

the honoring of checks drawn upon it. It can make what advances it wishes to any of its members with the assurance that the proceeds can only be transferred to the clearing account of another member. Its sole task is to see that its members keep the rules and that the advances made to each of them are prudent and advisable for the Union as a whole.” (ibid: 171).

} JM Keynes: rests on automatic, apolitical countercyclical adjustments of international macroeconomic imbalances: The “rules” can be agreed…◦ The ICU functions more like a commercial bank than a

central bank, but has no deposits, reserves or capital of its own. It is based on a currency unit/instrument to denominate debt. It can’t therefore be accumulated.◦ It serves only to bridge deficits temporarily (via adjustment

in both surplus and deficit economies), and includes measures to limit deficit expansion◦ Note that this is different from a reserve unit that can be

accumulated (hoarded) against risk

} Expansion of Special Drawing Rights (SDR) [‘basket’ of leading international currencies] rather than only US $ or international accounting currency]

} G20: Multilateral ad-hoc discussion on global adjustment mechanisms

} Create an international dispute settlement body for settling and re-structuring of sovereign debt

} Multilateral development banks or regional reserve funds

} Clearly, the proposal of an international currency unit (accounting currency) remains an important ‘thought project’ to govern international economic relations in the future.

} This would be governed by multilateralism, rather than by international financial markets, and thus provide an important counter-weight to a growing imbalance, not only between economies, but between a collective interest in global stability as opposed to short-term gains for special interests.

} Yet, this leaves us – apart from technical issues surrounding the exact design of such an international accounting unit – with the core question of how such, in principle, sensible plans can be realized politically.