What is wrong with the International Financial Architecture and some

elements for its reform

Alfredo Calcagno

UNCTAD3 October 2011

2

The International Financial System does not comply with the goals set in Bretton Woods:

• Stable exchange rates at sustainable levels.• Capital controls.• Timely financing in order to smooth adjustments and

limit their costs.• Avoiding lasting imbalances.

In addition,• Legitimacy eroded by unfair distribution of voting

rights• « Triffin Paradox »

3

Exchange rates, January 2006 – Sep. 2011(domestic currency per dollar, January 2006= 100)

40

60

80

100

120

140

160

03.0

1.20

06

03.0

5.20

06

03.0

9.20

06

03.0

1.20

07

03.0

5.20

07

03.0

9.20

07

03.0

1.20

08

03.0

5.20

08

03.0

9.20

08

03.0

1.20

09

03.0

5.20

09

03.0

9.20

09

03.0

1.20

10

03.0

5.20

10

03.0

9.20

10

03.0

1.20

11

03.0

5.20

11

03.0

9.20

11

Argentina

Brazil

Chile

Colombia

Mexico

4

Exchange rates, January 2006-Sep. 2011 (domestic currency per dollar, January 2006= 100)

40

60

80

100

120

140

160

03.0

1.20

06

03.0

5.20

06

03.0

9.20

06

03.0

1.20

07

03.0

5.20

07

03.0

9.20

07

03.0

1.20

08

03.0

5.20

08

03.0

9.20

08

03.0

1.20

09

03.0

5.20

09

03.0

9.20

09

03.0

1.20

10

03.0

5.20

10

03.0

9.20

10

03.0

1.20

11

03.0

5.20

11

03.0

9.20

11

China

Indonesia

Malaysia

Korea

Thailand

5

Exchange rates, January 2006-Sep. 2011(domestic currency per dollar, January 2006= 100)

40

60

80

100

120

140

160

03.0

1.20

06

03.0

5.20

06

03.0

9.20

06

03.0

1.20

07

03.0

5.20

07

03.0

9.20

07

03.0

1.20

08

03.0

5.20

08

03.0

9.20

08

03.0

1.20

09

03.0

5.20

09

03.0

9.20

09

03.0

1.20

10

03.0

5.20

10

03.0

9.20

10

03.0

1.20

11

03.0

5.20

11

03.0

9.20

11

India

Turkey

Pakistan

Sri Lanka

IMF-sponsored programmes systematically underestimate their negative impact on GDP growth and

fiscal balances

7

Total deficits and surpluses in current accounts, 1990-2011 (% of GDP)

-4 -3 -2 -1 0 1 2 3 4

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Deficits

Surpluses

8

Current account imbalances widened before the crisis, contracted and are widening again (billion $)

-1500

-1000

-500

0

500

1000

1500

2000

2005 2006 2007 2008 2009 2010 2011

European Union, excl. Germany

Germany

Japan

United States

Fuel-exporting countries

China

Other transition economies

Other developing countries: Africa

Other developing countries: America

Other developing countries: Asia

9

Possible responses: 1) At the national level

• Select an exchange rate regime that would reduce volatility and real misalignments (managed floating vs. « corner solutions »).

• Capital management• Reserve accumulation (self-insurance and limiting

appreciation).

Pros and cons:• Worked quite well in 2008• Costs of monetary sterilisation• Works better for avoiding appreciation than depreciation

10

International reserves, 2000-2010

In billions of current dollars

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Advanced Economies Emerging & Developing Economies

In percentages of GDP

0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Advanced Economies Emerging & Developing Economies

11

Possible responses: 2) At the regional level

• Use of national currencies for international transactions• Clearing systems• Credit among Central Banks• Regional exchange rate system• Regional development banks

« Modularity » of cooperative measures

12

Different types of financial integration  Multilateral

payments mechanism

Liquidity financing

Multilateral mechanisms for financing

and supervision

Finance for defending

exchange-rates and policy

coordination

Single currency

and regional Central Bank

Clearing house

 Yes

       

Reciprocal credit agreements (swaps)

 Desirable

 Yes

Supervision mechanism desirable

   

Regional reserve funds

 Desirable

 Yes

 Yes

   

Exchange-rate system

 Desirable

 Yes

 Yes

 Yes

 

Monetary union

 Yes

 Yes

 Yes

 Yes

 Yes

13

Possible responses: 3) At the global level Debate within the G 20:

• Cooperation or « beggar-thy-neighbor »• Still a recessive bias: fiscal adjustment, confidence game, structural

reforms• Debate on capital flows, liquidity, reserves, exchange rates• Market-oriented vs. macro prudential policies

More radical reforms?

• Multilateral agreements on exchange rates• From regional to global• A true international currency