UNITED NATIONS, (Reuters) – A reserve currency  system based on an IMF unit instead of the US dollar, a  proposal floated by China, could be phased in within a year,  Nobel Prize-winning economist Joseph Stiglitz said yesterday.

Stiglitz, a Columbia University economics professor who  heads a U.N. expert panel analyzing the financial crisis and  recommending reforms, addressed an issue that became a hot  topic this week.

Asked at a news conference when the International Monetary  Fund’s Special Drawing Rights (SDR) could replace the dollar as  the top reserve unit, Stiglitz replied, “It could begin to be  phased in next year.

He said the system could be phased in within 12 months.  “Realistically, I don’t think it’ll happen that fast,” Stiglitz  said.
One of the main issues left to be worked out is how the  SDRs would be allocated, he said.

The reserve currency topic is expected to come up at next  Thursday’s London summit meeting of the Group of 20 big  developed and developing nations on the financial crisis.

Stiglitz’s panel has issued a set of recommendations for  global financial reforms, including a proposal for a new  SDR-based reserve system.

In an 18-page report released yesterday, the panel said  such a system “could contribute to global stability, economic  strength, and global equity.” The panel said such an SDR system  would be “feasible, non-inflationary, and could be easily  implemented.”

Russia earlier this month proposed creating a new reserve  currency, to be issued by international financial institutions.  This week, China outlined how SDRs could take over the dollar’s  role as the global reserve unit.

On Wednesday, U.S. Treasury Secretary Timothy Geithner said  the dollar would remain the top reserve currency but expressed  openness to the expanded use of SDRs.

Stiglitz said there was a “growing consensus that there are  problems with the dollar reserve system.” He added that  economists have been discussing the weaknesses of  single-currency reserve systems for decades.

“One of the problems (with single currency reserves) is  that because of the huge level of volatility, countries are  accumulating large amounts of reserves,” he said.

The use of dollar reserves was also “contributing to the  weakness of the global economy,” the former World Bank chief  economist said.

“The dollar reserve system is deflationary, unstable and it  also has some inequity associated with it,” Stiglitz said.
Stiglitz said the effect of the dollar reserve system is  that developing countries have been lending the United States  trillions of dollars at almost zero interest rates when they  themselves desperately need that money.
“It’s a net transfer, in a sense, to the United States of  foreign aid,” he said.

Brazil’s President Luiz Inacio Lula da Silva also weighed  in on the issue on Thursday. In a news conference with British  Prime Minister Gordon Brown, he said it was important to  discuss Russia’s proposal but did not elaborate.

However, Canada’s finance minister, Jim Flaherty, predicted  in Ottawa that China’s SDR proposal would not get much  attention.

Stiglitz, asked about the U.S. and world economic outlooks,  was not optimistic. He said rich countries were doing too  little to help developing nations.