“Truman doctrine” could boost IMF firepower
The day before he returned to the U.S. Treasury for six weeks to help the understaffed Obama administration, Edwin Truman published a proposal to give the International Monetary Fund more firepower to fight the financial crisis.
Truman’s idea — a one-off $250 billion allocation of Special Drawing Rights (SDRs) to IMF member states — looks like the quickest way to put a safety net under developing countries and avert financial contagion. The Group of 20 world leaders should embrace it at the meeting in London on April 2.
U.S. Treasury Secretary Tim Geithner has not endorsed the plan in public, but the British minister preparing the summit confirmed it is one of the options under consideration. It could supplement a proposed doubling of the IMF’s resources and get around the reluctance of surplus countries such as China and Saudi Arabia to contribute more for now.
SDRs are international reserve assets, calculated in a basket of major currencies, that are allocated to the IMF’s 185 members according to their quota of the Fund’s capital. A special issue would be a bit like a global central bank printing money to help countries with payments difficulties.
A G20 endorsement would show financial markets that world powers are cooperating to overcome the crisis by supporting developing nations starved of credit by the collapse of international bank lending.
Among the benefits, it would reduce the urge for developing and emerging countries to devalue by boosting exports and amassing balance of payments surpluses and currency reserves to protect themselves against attacks on their markets. That could avert the kind of destabilizing imbalances that arose after the 1990s Asian crisis and ease growing pressure for trade protectionism.
Truman calculates that the poorest developing nations would receive $17 billion in SDRs directly and other developing countries would get a total of $80 billion.
Most SDRs would go to industrialized nations. But they could transfer them to developing countries at a nominal interest rate or hold them in reserve, for example giving European Union states a bigger war chest in case they need to support east European new members or neighbors with payments problems.
Sticklers for financial orthodoxy contend such a special issue of “funny money” would reduce the IMF’s leverage to enforce structural reforms in recipient countries through the conditionality of its loans, and could be inflationary.
But the proposed one-off SDR allocation is far smaller than the sums already being pumped into the system by western central banks, and it would not replace conditional IMF lending programs for individual countries in financial distress.
The move requires the support of 85 percent of the Fund’s membership. Geithner can approve up to $250 billion in SDRs without requiring Congressional authorization. Such a bold move would provide a tangible outcome to the London summit.