A MONETARY REGIME FOR A MULTIPOLAR WORLD / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

A monetary regime for a multipolar world


By Robert Zoellick

Published: February 17 2011 21:59

New agreements may be in short supply when finance ministers of the Group of 20 leading economies meet this weekend in Paris. But their efforts to address the weaknesses of the international monetary system deserve close attention. The international economy is shifting to a new multipolarity. About half of global growth is now from developing economies and this will transform power relations. The US dollar will remain the predominant reserve currency, but over time the world economy will need to manage a system of multiple major currencies. We need to modernise multilateralism to steer towards a new monetary system.


Money is power. Shifts in monetary regimes have signalled the rise of new political orders. It is not accidental that kings stamped their faces on coins. But when change is about co-ordination not domination, sovereigns need incentives to avoid a slow degradation of the old order. A new framework can offer just such incentives to encourage old and new actors in the global economy: the Group of Seven developed economies; the leading emerging market economies; the International Monetary Fund; the World Bank; and the World Trade Organisation.

The developed economies of the G7 have an interest in establishing an important norm: to maintain flexible exchange rates, without intervention, unless the group agrees special circumstances warrant action. Over past years, with a few exceptions, this policy has been an unwritten norm. Now the G7 should issue a statement to reflect this agreement and set a standard for others.


Most big emerging markets have been moving towards flexible exchange rates and autonomous monetary policies, enabling them to operate more independently, focusing on sound domestic economic policies and eschewing “beggar thy neighbour” tactics. But a number have struggled with “hot money” flows. The G20 should support them by backing efforts of the IMF and World Bank to suggest “good practices” that enable developing countries to manage these problems while remaining open to investment. For example, Chile used transparent mechanisms in the 1990s that relied on price signals. The World Bank is also assisting in the development of domestic currency bond markets, which help emerging markets manage currency risks and capital flow volatility. Over time, most large emerging economies should move to the G7 norm; smaller economies may need to retain flexibility, but this could be accommodated, perhaps by a code of conduct.

The economies whose currencies constitute the reserve asset known as special drawing rights – the US, the eurozone, Japan and Britain – should meet in an SDR forum with the IMF to review monetary and currency issues. This group should offer China the incentive to join the forum and eventually the SDR after it takes steps to internationalise the renminbi and moves towards an open capital account.


China has recognised the need for this transition, and it has accepted that membership in multilateral bodies requires shared rules and obligations. This forum could stimulate an internal debate about preparations for renminbi internationalisation, just as China’s accession to the WTO prompted domestic reforms.


Over time, other major internationalised currencies could be added to the SDR basket and forum. Leading powers are not going to accept the SDR as a new global reserve currency, nor the IMF as a global central bank. But the guardians of the principal reserve currencies need to co-operate to support a healthy global economy – or at least manage differences.


Within this new framework, the IMF should be a referee, able to blow the whistle on the appropriateness of external policies but not to impose penalties. The IMF should be directed to sharpen the multilateral review of “capital account” policies, as part of the G20’s new mutual assessment process (MAP). This review should compare national policies with international information indicators, including commodity prices such as gold. The IMF’s involvement, with its 187 shareholders, offers the G20 the incentive of greater legitimacy and the support of an institution with financial resources.


Finally, the G20 should urge the IMF and WTO to consider the implications of the WTO’s GATT Article 15, which in effect suggests that economies should not use exchange rate policies to take away the benefits of lower trade barriers. Its use would require a determination by the IMF. Though this article has never been invoked and there are ambiguities about its exact use, the G20 should at least consider it as a possible incentive or disincentive.


A framework to manage a monetary system in transition may be less headline-grabbing than sudden regime change, but it is a lot more realistic. Modernising the management of international monetary affairs could prove an important contribution to future growth. The time of powerful kings is long gone. But today’s leaders still have the chance to stamp their mark on the monetary framework of tomorrow.


The writer is president of the World Bank Group


Copyright The Financial Times Limited 2011