No matter whether the United States of America wants it or not, world monetary system is undergoing a change with the rise of China on the global stage as the number two economy. China is pushing a strategy to bring a change in the IMF system, sometimes overtly, sometimes covertly.
The USA became the number one country both militarily and economically after the World War II, and under the initiative and leadership of the USA, the present monetary system was set up through Bretton Woods Conference at the end of the war in 1946. The Bretton Woods Conference paved the way for setting up of two institutions named the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) which later became known as the World Bank.
In both the institutions, the US wielded tremendous influence, so much so that without its consent the basic charter or the founding articles of these institutions cannot be changed. The IMF was created to oversee the global currency system and to offer balance of payment support to countries facing trade deficit. IMF also participates in the normal budgetary support and the bail out programmes needed by the member countries. Bretton Woods system adopted the US dollar as the number one currency in the international transaction settlements. In fact, the since the IMF system took over the overseeing role of the world's financial system, the US dollar took the front seat by pushing other contending currencies like British Pound to the back seat, though the British Pound and some other currencies, including Japanese Yen, Canadian dollar and Australian dollar, are still being used worldwide as reserve currencies side by side the US dollar. The main reason behind the rise of the green back, the other name of the US dollar, as the most coveted currency is the rise of US economy as the number of one economy after the war and also the guarantee of the US government that the value of greenback would be backed by the specific gold amount.
Though the standard of measuring the value of currencies in terms of gold took a back seat much before the Bretton Woods Conference, world leaders who gathered at the conference wanted some sort of tying of the main reserve currency to gold reserve so that currency's values could be maintained. Only the US came up to offer the guarantee that 35 US dollars would buy one ounce of gold. Thus, a sort of gold standard again came back in determining the value of the currency. That guarantee worked up to 1971. Since 1971 the US refused to give any guarantee of greenback's value in terms of gold. Now, there is no standard or backing of the value of a currency by any precious metal like gold. The world financial system, though still is based on one kind of dollar standard, it is more or less based on confidence of the users of the currencies.
IMF has its own currency known as the SDRs, the unit of which consists of the recognised reserve currencies such as US dollar, Euro, Japanese yen, British pound etc.
But since the adoption of US dollar or the IMF's SDR as the world's leading currency or as the acceptable mode of payment in the international transaction system, world's economic scenario has undergone a tremendous change. China has now emerged as the number two economy by pushing back the Japanese economy from the place. Some other emerging economies like India and Brazil now emerged as important players on the world's economic stage. But the currencies of the newly-emerged economies are not findings due importance in the IMF system.
The main reason why the IMF-sponsored system does not want to change is the opposition from the US lawmakers. The US lawmakers vehemently oppose any change in the IMF system and do not want to recognise the rise of any other currency parallel to the US dollar. For adoption of any change in the present global financial system, the IMF charter or founding papers need to be changed which is not possible without the consent of the US govt.
The present system serves the interest of the USA most. Though on the wane, still roughly 50 per cent of global transactions are performed in US dollar. The world's financial system seems to remain hostage, to some extent, to what the US monetary authority or the Federal Reserve System (Fed), the American central bank, does or does not. In the recent years, the US dollar is gaining in value vis-à-vis currencies like the Euro, but there were times when US dollar lost value to the annoyance of the dollar holders. Many central banks wanted to shift or reshuffle the dollar holding in favour of the more stable currencies but they had little options.
China being the number two economy wants reforms in the IMF system, but so far with no result. Recently, China again approached IMF for inclusion of its currency Yuan in the IMF's basket of reserve currencies and also in the SDRs, but the approach bore no result.
After having failed in bringing any change in the IMF system, China charted out two other strategies to put its currency Yuan in the world financial system. One, prodding small emerging trading partners to adopt Yuan in international payments, especially when doing trading with China. China already has set up Yuan cleaning arrangements with 10 countries and signed currency swap agreements with 28 central banks. As the other strategy, China along with other emerging economies like Brazil and India may opt for a separate international monetary fund of their own. China and other emerging economies have already decided to set up a multilateral development bank styled as the New Development Bank (NDB), formerly referred to as the BRICS Development Bank, which many want to see as parallel to the World Bank.
China is also taking a lead in setting up an Institution or bank known as the Asian Infrastructure Investment Bank (AIIB) exclusively for investment in infrastructures in the Asian countries. Bangladesh has already subscribed to the equity capital of the proposed bank, and more countries like the U.K. and Australia are thinking to join the bank as founding members. But the US sees the formation of the AIIB with suspicion, and it thinks that over time the proposed bank will undercut the interest of the Asian Development Bank (ADB), in which the US is a big shareholder.
The fact is, whether US government and the Congress, its law making body, want it or not, world financial system, especially the international settlement system is poised to undergo a big change. If the IMF system fails to adopt a more inclusive approach, then the system itself will be on the wane in the face of the growth of a parallel and more accommodative system on the world stage.
The writer is Professor of Economics, University of Dhaka. abuahmedecon@yahoo.com
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