Global Monetary Reforms Needed to Tackle Imbalances

Wide-ranging reform of international monetary system still needed

Political will needed to sustain cooperation and implement reforms

Large and volatile capital flows, exchange rate pressures persist

Possible greater role for IMF's SDRs in monetary stability in longer run

The global recovery should not be an excuse to put reform on the backburner. “Global imbalances are back, with issues that worried us before the crisis—large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves,” IMF Managing Director Dominique Strauss-Kahn said.

Concerns that the recovery is not yet delivering on much needed employment growth and equality were voiced by Strauss-Kahn and fellow panelist Kemal Derviş of the Brookings Institution at the February 10 event. “The world is doing reasonably well … but in terms of labor markets and employment there is a huge problem … almost everywhere,” Derviş said.

“Reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system’s ability to prevent future crises,” Strauss-Kahn told the 100-plus audience.

Addressing imbalances

While acknowledging the progress that had been made in expanding the tools to deal with crisis, Tim Adams, Managing Director of the Lindsey Group, was also “focused on the big issues, and that is imbalances.”

The problem is not just demand imbalances that contribute to disruptive flows. According to Derviş, the “accumulation of liquid assets in dollars year after year … could be extremely destabilizing.”

Global rebalancing should focus on dealing with large exchange rate misalignments, argued Fred Bergsten, Director of the Peterson Institute for International Economics. However, he acknowledged that “at present, most of the major exchange rates are in reasonable alignment” and, for the renminbi “there is significant evidence that misalignment is moving toward a correction.”

Panelists agreed that strengthening IMF surveillance—better monitoring economic and financial conditions, policies, and risks—would also help in setting policies that promote global balance, reduce volatility, and avert future crises.

“It’s the job of the Fund to be cautious and proactive … The Fund should not neglect to point out the risks,” said Derviş.

Derviş was right to say that we have to err on the side of caution, Strauss-Kahn said. He pointed to steps the IMF had taken to strengthen...