Significant progress has been achieved in this direction during the recent period with the creation by the IMF of new facilities and a new SDR allocation, the biggest ever, for the equivalent of 250 bn USD. More needs to be done and work should be undertaken to find sources of international liquidity truly substitutable to reserves without creating undue and excessive moral hazard. And, finally, an important question is to find, in the future ,reliable international stores of value. The crisis has amplified the “asset shortage” as some instruments, up to now considered as riskless, have proved very vulnerable to changing financial conditions. The ability of the private sector to create “safe” assets through financial innovation has proved largely illusory. So, in the period to come there may be both an increased demand worldwide for risk free assets and much less certainty on their future supply. The search for a reliable international store of value has been going on for many decades. When discussions were held to build the Bretton Wood system, Keynes proposed the creation of a new international currency, the “bancor” which could serve both as a source of liquidity and a store of value. Thirty years ago, there was extensive discussion in the IMF on the creation of a substitution account. Most recently, in 2009, Governor Zhou has reopened the debate and suggested, over the long run, the creation of a new “super reserve” currency, while, in the meantime, enhancing the role and status of the SDR.
Jean-Pierre Landau: Rebalancing the world economy – a common challenge Keynote address by Mr Jean-Pierre Landau, Second Deputy Governor of the Bank of France, at the Chinese Academy of Social Sciences Economic Forum, Beijing, 11 November 2010. * * * In preparing those remarks, I was very influenced by the works by Ricardo Caballero and Raghuram Rajan (see references) among others. All interpretations and errors are mine. Great changes are taking place in the world economy. The center of gravity is moving to Asia and the emerging world. This has been recognized in the landmark agreement on IMF reform reached at the last G20 Ministerial meeting. China has become the IMF’s third shareholder, India has moved up by five ranks and Brazil is now on par with Canada (a G7 country). Symmetrically, the European representation in the Board will be reduced by the equivalent of two chairs (out of nine currently held). At the same time, we are facing great challenges. Output is growing fast in emerging economies but this relative shift in production has not been fully matched by a rebalancing in demand. Overall, beyond the turbulences caused by “hot money”, net capital flows are going “uphill” from emerging to developed economies. That means that some of the poorest citizens of the world are lending money to some of the richest, allowing those to finance their consumption. And financial bubbles have tended to proliferate in an environment of permanently low inflation and ample liquidity.