GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY

GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY

Benjamin J. CohenUniversity of California, Santa Barbara

Remarks prepared for presentation at a Conference on the BRICS and Asia, Currency Internationalization, and International Monetary Reform, Hong Kong, December 10-11, 2012

LIVING WITH TURMOILLIVING WITH TURMOIL The int’l monetary system faces multiple threats

Europe’s sovereign debt crisis Weakening US dollar Dimming growth prospects “Currency wars” Volatile capital flows

Is worse to come? In my opinion, No. Governments will muddle through. Modest reforms are possible – but not more.

Outlook: We have to learn to live with a certain amount of monetary turmoil.

OUTLINE OF MY REMARKSOUTLINE OF MY REMARKS

1. The central challenge: governance 2. The four key elements of global

monetary governance Adjustment Liquidity Confidence Leadership

3. Implications for the BRICS and Asia

THE CENTRAL CHALLENGE: GOVERNANCETHE CENTRAL CHALLENGE: GOVERNANCE

Governance: arrangements for the formulation, implementation, and enforcement of the “rules of the game”

In short, who’s in charge?

GLOBAL MONETARY GOVERNANCEGLOBAL MONETARY GOVERNANCE

“Governance without government” No central authority: governance must

rely on cooperation among sovereign governments

Two problems Compromises are inevitable; the rules will

always be sub-optimal Violations are likely: behavior will be

imperfect, too

GLOBAL MONETARY GOVERNANCEGLOBAL MONETARY GOVERNANCE

Four critical elements:

Adjustment: management of exchange rates

Liquidity: management of the supply of balance-of-payments financing

Confidence: maintenance of trust in principal instruments of liquidity

Leadership: exercise of power for the common good

BRETTON WOODS SYSTEMBRETTON WOODS SYSTEM Design was state-centric: key decisions to

be made by governments or their agents (IMF). Rules were clear and transparent

Adjustment: par-value system Liquidity: International Monetary Fund Confidence: US dollar was “as good as gold” Leadership: the United States

THE SYSTEM TODAYTHE SYSTEM TODAY Two major changes

Revival of global financial markets Exchange rates now determined by markets Financing is also market-determined Greater risk of destabilizing shifts of confidence

among major currencies Result: a sharper risk of systemic crises

Diffusion of power among states Deadlocked leadership

Can matters be improved?

ADJUSTMENTADJUSTMENT Amendment of IMF charter (1978)

Exchange rates free to float Subject to IMF surveillance

But surveillance has been ineffective States have been free to do what they want Result: risk of “currency wars”

Reason: Demands of national sovereignty Unlikely to change

LIQUIDITYLIQUIDITY With revival of financial markets, liquidity supply has

become hostage to investor sentiment Behavior is often pro-cyclical Thus tendency toward repeated crises

Failed responses by governments Repeated promises to strengthen rules In practice, little accomplished Example: Europe’s sovereign debt crisis

Reason: again, demands of national sovereignty Again, unlikely to change

CONFIDENCECONFIDENCE Toward a “leaderless” currency system

Dollar’s dominance is weakening But there is no obvious alternative Heightened risk of sudden shifts of confidence –

destabilizing capital movements

Good or bad? Good? Greater discipline on the US – no more

“exorbitant privilege” Bad? Others will also seek to enjoy an

exorbitant privilege

LEADERSHIPLEADERSHIP Effective leadership rests on two critical

factors: Consensus on basic principles Concentration of power

Most conspicuous today by their absence. Consensus has broken down Power is more diffused (especially autonomy)

IMPLICATIONS FOR BRICS AND ASIAIMPLICATIONS FOR BRICS AND ASIA Revival of global financial markets

Advantage: ready access to finance Disadvantage: vulnerability Policy option: capital controls?

Diffusion of power among states Gain to date: autonomy Potential gain: influence Policy option: build a “winning coalition”? Problem: still no consensus on what is needed

AGENDA FOR BRICS AND ASIAAGENDA FOR BRICS AND ASIA

Adjustment: prepared to accept IMF surveillance?

Liquidity: prepared to submit domestic finances to int’l rules?

Confidence: prepared to forego an “exorbitant privilege”?

Leadership: prepared to share the responsibilities of governance?