Prasarn Trairatvorakul: Towards a multi-polar currency and reserve
system
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the High-Level
Conference on the International Monetary System, Zurich, 10 May 2011.
* * *
Governor Hildebrand,
Managing Director Strauss-Kahn,
Distinguished Speakers,
Ladies and Gentlemen,
1. I would like to thank the co-hosts, the Swiss National Bank and the International
Monetary Fund, for inviting me to speak at this high-level conference. So far in this session,
we have listened to a number of insightful presentations by well-known speakers. To avoid
repeating what has been said, I will try to frame my talk from the perspective of a small
emerging market economy. My focus will be on the three problematic issues facing emerging
market economies and the current international monetary system, and how we may think of
what needs to be done to put our international monetary system on a more sustainable path.
2. Let me start with the first issue. As of now, excess global liquidity generated under
the current international monetary system is complicating the conduct of macroeconomic
policy in many emerging market economies. Although the expansion of the global economy
has strengthened in the past few quarters, economic cycles and thus monetary policy stance
among various regions greatly differ. This has been widely regarded as a key push factor for
international capital flows into emerging markets. The additional liquidity infused into these
economies occurs at a time when it is necessary to withdraw economic stimulus and
normalize or even tighten monetary policy. This is an example of the inconsistency between
global liquidity and regional economic cycles.
3. The second issue is the current international monetary system which is not aligning
with the changing structure of the global economy. As we all know, one outcome from the
current crisis is the growing role of emerging market economies, particularly in Asia. This
multi-polar economic landscape is something for policymakers to consider whether there is a
need to move to a multi-polar currency system. The end goal should be to retain the
efficiency of the current system while enhancing its stability going forward.
4. The third issue is, despite the shortcomings of the current international monetary
system, the international community has not been able to make a transition to an alternative
system. In practice, it is difficult to identify a currency to compete with the US dollar as there
are certain criteria to qualify as reserve currency. First, a reserve-issuing country has to
illustrate a good track record of prudent macroeconomic policy. Second, such country must
have an open capital account regime supported by deep and liquid financial markets. Should
these two criteria are satisfied, such currency has a potential to be widely accepted and used
in private international transactions. Today, it is difficult to find an alternative currency which
satisfies these conditions. The loss of economies of scale from using the incumbent currency
is another constraint preventing the move away from the current dollar-based system. As
such, the dollar continues to dominate the international reserve system both in terms of
reserve assets and international trade and financial settlements.
5. Given these difficulties, the current international monetary system will prevail but it
may be prone to occasional instability as we have experienced in the past. In the meantime,
we may still want to consider how to enhance the role of emerging market economies such
as BRICS in the international monetary system. Such arrangement is arguably an avenue for
these emerging market economies to share the privilege of reserve-issuing countries. It
would also be a means of increasing the supply of reserve currencies to serve future demand
for reserves along with the growth of the global economy.
6. To facilitate such diversification process, the BRICS need to also play their part by
further opening the capital accounts, allowing currency convertibility and deepening and
widening their financial markets. Once these conditions are achieved, the inclusion in the
SDR basket would increase the demand for BRICS currencies.
7. It is important to stress that by adding BRICS to the international system is not a
panacea. A key concern is the fact that the Triffin dilemma1 could still be problematic. In other
words, the provision of global liquidity will continue to largely depend on the macroeconomic
conditions of the reserve-issuing countries. As such, there is a great need for policy
coordination among them to ensure an orderly supply of global liquidity. In the worst-case
scenario, the multi-polar system could be more unstable especially during crisis periods. This
is because the reserve currencies are close substitutes among themselves. As such,
deterioration in the financial position of one reserve-issuing country could lead to severe
capital flight, causing volatility in both exchange rates and asset prices. At this point, it is
difficult to foresee if the management of global liquidity in the multi-polar system would be
easier or more difficult than the current system.
8. As the multi-polar system is not immune from capital flow volatility, I would like to
make a brief comment on recent IMF framework on capital flow management measures.
While we support the work of the IMF in conducting empirical study on country experiences
in managing surges of capital inflows, we do not support any rules-based approach in
dealing with capital flow issues. Policymakers should be able to respond to such challenge in
a pragmatic rather than rules-based manner.
9. Let me finish my talk with some comment on the SDR. In theory, there are many
good reasons to enhance the role of SDR as one of its distinct advantages is the possibility
of managing global liquidity without affecting the value of currencies in the basket. In
addition, the basket also has the diversification advantage as the system will be less
exposed to shocks in any of its constituent economies. At this time, it may not be possible to
move towards this system as there is not enough political support and many operational
hurdles remain to be overcome. Nevertheless, it is important for the IMF to continue its work
on how to broaden the use of SDR in all aspects of an international currency (i.e. store of
value, medium of exchange and unit of account).
Ladies and Gentlemen,
10. In closing, I would like to stress that the international monetary system is certainly in
a period of transition. I do not expect a big bang, but a long and gradual process arising from
macroeconomic and structural adjustments. Policy dialogue and cooperation between
current and prospective reserve-issuing countries will play an important role in ensuring this
smooth transition. As there are so many uncertainties along the way, it would take great
leadership from some advanced and major emerging market economies to move the world
forward towards a more stable international monetary system.
Thank you