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.