Waterloo, Canada - Management and resolution of the very large payments imbalances among countries and regions is a central issue for international financial reform, states a new policy brief released today by the Centre for International Governance Innovation (CIGI).
In International Payments Imbalances and Global Governance, author Eric Helleiner writes that the current instability has raised concerns about global payments imbalances and whether they can continue to be financed smoothly.
"If volatile capital flows provoked the need for sudden macroeconomic adjustments and currency fluctuations, the resulting economic upheavals could generate heightened political tensions both within and between countries," explains Dr. Helleiner.
Dr. Helleiner, CIGI Chair in International Governance, argues that governance innovations are needed to solve the issue of imbalances. Among his suggestions are: expanding the G7 financial decision making, creating "substitution accounts" to ease the shift away from a dollar-centred international monetary order, fostering a greater role for surplus regions and negotiating new multilateral rules for investment flows.
International Payments Imbalances and Global Governance cites three unique factors that should guide the process of finding solutions to the payments imbalances: (1) The distinct geography of contemporary payment imbalances, (2) The U.S. dollar's changing position as the world currency and (3) The growing influence of sovereign wealth funds.
In view of recent global shifts, a forum wider than the G7 is needed in which surplus countries such asChina, India and Saudi Arabia can join with the United States and other deficit nations in discussing financing of the imbalances and adjustments necessary to correct them."Countries accumulating large surpluses have mostly been non-G7 countries, particularly China - and without Chinese involvement, negotiations to address international economic imbalances are meaningless," says Dr. Helleiner.
With the U.S. dollar facing potentially its most serious challenge to date as the international reserve currency, Dr. Helleiner suggests the creation of a mechanism, such as the "substitution account" discussed at the International Monetary Fund (IMF) in the late 1970s, which would enable foreign governments to diversify their reserves away from the American currency without excessive disruption. He argues that an orderly shift from the dollar-centred international monetary order would enable macroeconomic diplomacy to function more effectively in today's decentralized monetary environment.
The governance of international payments imbalances must adjust to one further change in the global economic landscape: the rapid growth of sovereign wealth funds (SWFs) that now total about US$3 trillion in assets. He argues that restrictions on investment by SWFs in deficit countries would not just antagonize developing (surplus) countries but also inhibit the role that these funds can play in recycling surpluses.
International Payments Imbalances and Global Governance is a publication of "Breaking Global Deadlocks" project, undertaken jointly by CIGI and the Centre for Global Studies (CFGS).
In addition to this policy brief, CIGI has also released a backgrounder study for the upcoming G20 summit in Washington, DC on November 15. Towards the G20 Summit: From Financial Crisisto International Regulatory Reform, co-written by Dr. Helleiner and Stefano Pagliari, overviews the major issues for the leaders' November 15 summit. This backgrounder covers bank regulation, credit derivatives, the role of credit rating agencies and accountants, hedge funds and the offshore sector. The study concludes by suggesting that if the U.S., Europe and key Asian countries cannot agree on the re-regulation of the system, a growing fragmentation of international regulatory politics will become ever more likely.
For more information about CIGI and to download these papers, please visit www.cigionline.org/publications