Why Should The Global Reserve System Be Reformed?

Running Head: WHY SHOIULD THE GLOBAL RESERVE SYSTEM BE REFORMED?
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Why Should The Global Reserve System Be Reformed?
6/22/2018

WHY SHOIULD THE GLOBAL RESERVE SYSTEM BE REFORMED?
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Why Should The Global Reserve System Be Reformed?
Introduction
“Why Should the Global Reserve System Be Reformed?” was an article published in
Globalization and Development Journal in the January 2010 issue. José Antonio Ocampo,
writer of this article focuses on current flaws in global reserve system, moving to Multi-
Currency System, and an SDR-Based Global Reserve System. Each section of this article is
supporting the fact that the global central currency known to be as U.S. dollars should be
reformed because the Central Currency needs to be stable and dominant. Various arguments
also made whether this policy should be supported or not, flaws and benefits. Here the work
of a reviewer is of an analyzer and evaluator and the objective is to be critically analyzed the
article and check whether the presented arguments in the article were accurate, finding out
any deviations or gap and to develop new understanding relevant to the topic.
Summary of Article
In this article, U.S dollars a recognized, dominant and global currency, should be reformed as
this reserve currency is lacking a very important principle – “stable value.” Chinese Central
Bank Governor, Zhou Xiaochuan submitted a proposal that there is a need to change the
global reserve system and supported by the various groups of experts.
In this current system, there were three basic flaws, which include –
 Recessionary Pressure
 Treating U.S. dollar as the major global currency
 Growing inequity bias
During financial crises, the deficit countries have to face various dilemmas due to lack of
capital or funds whereas the surplus countries simply get out of these situations. A proposal
islso made by Keynes’ that consists of financing deficit countries by the surplus nations but it
is rejected and another policy is set up with various conditions which state that IMF will fund
those deficit countries. He suggested creating a clearing union, which help in making system
symmetric. In general, this statement comes true during the periods of balance of payment
crises, such as the one we are experiencing today.
The second flaw was related with treating U.S. dollar as the major global currency. A Belgian
economist in 1960 stated a concept - The Triffin Dilemma, faced by those nations, who issue
reserve currencies and these countries have to balance their currencies according to the
domestic demand of their nation as well as global demand because these currencies were used
for global trade. Before globalization, the U.S. has a greater balance between BOP due to its
currency but after globalization, various countries’ currencies were going and coming
correspondently and then also dollar is regarding as a global reserve currency.

WHY SHOIULD THE GLOBAL RESERVE SYSTEM BE REFORMED?
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Growing inequity bias that personifies the system was the third flaw. Foreign exchange assets
and reserves largely held in the dollar. This reserve created in global imbalances and a better
policy with fewer conditions should be created by IMF and by daunting developing countries
to hold various significant reserves. Generally, Growing nations preferred the protective
effect of self-insurance instead of IMF already have limited financing available and so the
inequities and instabilities in the system were deeply interconnected.
It is necessary to emphasize these three flaws influence the current system and it cannot be
solved if various countries compete for the status of their currencies.
The author has suggested various ways to cope-up with the situation like moving to a Multi-
Currency System, an SDR-Based Global Reserve approach etc. Multi-Currency features were
present in the economy but only two-thirds of global foreign exchange reserves and one have
to depend upon U.S. treasury bills. Therefore, Developing countries can diversify their
foreign exchange with the help of multi-currency system. The author also suggested adopting
an SDR-Bases Global Reserve System which helps in reducing US dependence, creating a
more stable system and help developing countries to by empowering them to maintain more
adequate reserves and indirectly the international trade will also get strengthen. Also, IMF
promotes complementary reform, which empowers nations to convert their dollar reserves
into SDR (Special Drawing Rights) based assets that create stability towards the current
system and thus serves as a transitional route towards a truly global reserve currency.
So author concluded the article by focusing on the promotion of the IMF into fully based
SDR institution so that the collective insurance improves during crises, which also lead to
stability, but there were various obstacles like political influence, which have to be tackled. It
contains benefits and welfares for all countries.
Critical analysis of Article
This article gives in-depth issues of the current global reserve system and various healing
ways to prevent instability and secureness to the developing countries. Here the various
global imbalances were discussed which is faced by the world economy during crises. IMF,
which stands for International Monetary Fund, is an organization, which promotes economic
growth and creates financial stability for encouraging international trade. The major activities
of IMF are lending finance, surveillance, providing technical assistance etc. It plays an
important role in the system by promoting SDRs scheme, multi-currency system, and
complimentary reforms with transitional arrangements. According to the author, SDR-Based
Global Reserve System will follow two approaches –
 Distributing them in a countercyclical way, which means that the issue will be done
during the period of crises rather than the booms as this, will help in preventing them
from the deflationary pressure that is faced by world economy during these periods
for adjusting deficit countries demands.