The World Bank’s former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.
“The dominance of the greenback is the root cause of global financial and economic crises,” Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. “The solution to this is to replace the national currency with a global currency.”
Lin, now a professor at Peking University and a leading adviser to the Chinese government, said expanding the basket of major reserve currencies — the dollar, the euro, the Japanese yen and pound sterling — will not address the consequences of a financial crisis. Internationalizing the Chinese currency is not the answer, either, he said.
Lin urged the international community, especially the US and European Union, to play a leading role in currency and infrastructure initiatives. To boost the global economy, he proposed the launch of a “global infrastructure initiative” to remove development bottlenecks in poor and developing countries, a measure he said would also offer opportunities for advanced economies.
The concept of a global “super currency” tied to a basket of currencies has been periodically discussed by world leaders as well as endorsed by 2001 Nobel Memorial Prize-winner Joseph Stiglitz. A super currency could also be tied to a single currency, but the interconnectedness of world financial markets and concerns about the volatility that can occur as a result of the system being tied to one currency have made this idea less popular.
Eswar Prasad, a trade-policy professor at Cornell University who also is a senior fellow at the Brookings Institution, said he disagrees that a super currency would protect the global financial system against breakdowns such as the 2008 downturn which plunged the world economy into its most dangerous crisis since the Great Depression of the 1930s.
“Flexible exchange rates provide a useful shock absorption mechanism, especially for emerging market economies,” Prasaid, a former chief of financial studies in the International Monetary Fund’s research department, told China Daily on Tuesday. “More effective financial regulation and improved global governance, along with better fiscal and structural policies, would go much further than a single currency in enhancing global financial stability,” he said.
Arguments in favor of a global currency resurfaced during October’s US budget impasse, which forced the government to shut down.
“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world,” a Xinhua News Agency commentary said on Oct 14. The piece argued that creating a new international reserve currency to replace reliance on the greenback, would prevent government gridlock in Washington from affecting the rest of the world.
Chen Wenling, chief economist at the China Center for International Economic Exchanges, a government think-tank, said, “A supranational currency may be a new direction for development of the global financial system. It also requires different countries to cooperate in coordinating macroeconomic policies.”
Bloom and Chen both said China needs to play a more important role in global financial governance. But Bloom said it is difficult for international financial organizations to reach a consistent conclusion on how to improve the foreign exchange system.
He said the renminbi is predicted to be stronger this year, even against an appreciating US dollar, and internationalization of China’s currency will accelerate when the government decides to further open the capital market.
Pierre Defraigne, executive director of the Madariaga College of Europe Foundation in Brussels, said of Lin’s infrastructure proposal, “It is excellent, but the problem is how to implement these plans to link those countries that need such infrastructural construction and those with enough foreign reserves, by using an effective global mechanism.”
Full article: Replace dollar with super currency: economist (China Daily)