The Rise and Fall of SDRs (1970-2000)

order to reduce the burden of the heavily indebted countries, particularly its client states, the US and other creditor countries insisted on debt renegotiation and rescheduling. As a result, the IMF created the Structural Adjustment Facility (SAF) in 1986 and the Enhanced Structural Adjustment Facility (ESAF) in 1987. The creation of a Systemic Transformation Facility (STF) in 1993 to respond to the economic crises of Central Europe, the Baltic Countries, and the former Soviet Union provides more loans to those countries. The constant shaping and reshaping of the Fund’s loan policies since the mid-1980s has benefited the developing countries by allowing them to enjoy increased leverage in the bargaining process.²²⁵

During late the 1960s and early 1970s, considerable debate took place over an appropriate way of distributing SDRs, with developing countries favoring the establishment of a “link” between the SDR allocation and the provision of foreign aid.²²⁹ In May 1966, the Group of Thirty-One Developing Countries insisted that “monetary management and cooperation should be truly international and …all countries, which are prepared to share in both the benefits and obligations of such new monetary arrangements as may be devised, should be eligible to participate in the creation of new reserve assets.”²³⁰ In a similar vein, on the IMF’s Executive Board, the representatives of developing countries insisted that “all countries, not only the economically big ones,” should be involved in the discussion of reform.²³¹

Under such circumstances, the IMF arranged joint meetings between the G-10 deputies and the Fund’s Executive Board as a forum for the discussion of reserve creation in 1966. At the very beginning of the meeting, the discussion about the name of the new reserves—composite reserve unit, suggested a clear challenge to the position of the US dollar and might offend American sensibilities. Germany and France produced a vigorous criticism of the US position as openly dominating. French politicians focused on the reserve issue and insisted on the preeminent role of gold as a means of countering the American challenge. French Finance Minister Valery Giscard D’Estaing announced at the Annual Meetings of the IMF and the World Bank in 1964: “the World Monetary system must be set in concentric circles: the first one being gold, and then, the second, if necessary, recourse to deliberate and concerted creation of either reserve assets or credit facilities.

The inner circle is gold. Experience in recent years has shown us that, aside from any theoretical preference, gold remains the essential basis of the world’s payments system.”²³² In July 1967, after heated discussions and debate, the word “reserve” was dropped from the discussion of the composite reserve unit and the concept was rephrased as a “special drawing right” or SDR.

With regard to the opinions of the Group of 77, instead of allocating resources through international financial organizations such as the IMF, a direct distribution of money was preferred.

Developed states, especially the United States and Germany, rejected a link between development aid and the creation of new reserve assets, meanwhile the United States and the United Kingdom

229 Graham Bird, IMF Lending to Developing Countries: Issues and Evidence, New York: Routledge, 1995, p. 82.

230 Ibid.

231 Harold James, International Monetary Cooperation Since Bretton Woods, p. 166.

232 Harold James, International Monetary Cooperation Since Bretton Woods, p. 166.

preferred to shape the new reserve in such a way that it would be readily accepted in place of gold.

Another representative thought came from France that was eager to retain gold as the heart of the international monetary system and strongly preferred that the new unit be more like credit than like money. The final result of the bargaining among these countries was boiled down to a compromise.

Firstly, the essence of the SDR was defined as a blend of both a reserve asset and a credit, and secondly, the distribution of SDRs should be according to IMF quotas. The LDCs had wanted 28 percent of the initial allocations, which was considerably higher than the amount they would have received based on their share of world trade (9%) or world GNP (14%). Thus, while the LDCs did not get a clear link between development financing and the creation of new international liquidity, they were able to share in the resources provided by the creation of the SDR.²³³

After the specific features of the SDR had been decided on, the difficult question of what voting power would be required for implementing the plan and for any decision to create more SDRs thereafter had to be answered. The majority of 85 percent of the total voting power of the Board of Governors was agreed on.²³⁴

However, the SDR department is, in essence, funded almost entirely by the United States. Over the last ten years, American lending has averaged $4.1 billion, virtually matching developing country borrowing of $3.8 billion. Over the last three years, (from 2002 to 2004) American loans have risen to more than $5 billion, exceeding developing country borrowing by $1.4 billion. The other industrialized countries as a group are actually net borrowers from the SDR Department in the amount of approximately $4 billion. The only other significant supplier of funds is Japan, which contributes financing of approximately $1.3 billion.²³⁵

The US agreed to establish SDRs mainly to relieve the pressure imposed by the fixed rate for the dollar. However, after the collapse of the Bretton Woods System, the United States needn’t bear the pressure for gold-dollar transactions, and the SDR became less important and lost American support. The proportion of SDRs in world reserve, since the 1980s, continuously dropped such that by the end of 2000 it only accounted for 1.175% of the whole, which means that at this time the SDR

233 William R. Cline, International Monetary Reform and the Developing Countries, Washington, D.C.: Brookings Institution, 1976, pp. 48-49.

234 Edited by the International Monetary Fund Branch of People’s Bank of China, International Monetary Fund, Beijing Industry University Press, 1994, pp. 94-5.

235 Adam Lerrick, Opening a Back Door to Foreign Aid: The SDR Department at the IMF,” at http://www.house.gov/jec/imf/sdrdept.pdf.

plays a very limited role as a reserve asset: its main function is to serve as the unit of account of the IMF and some other international organizations. However, the share of SDRs seems to be incompatible with its so-called international reserve assets.²³⁶ To pursue the point further, some American scholars even insist that US should reduce support for the SDR further. In their eyes, “the developing countries receive SDRs, exchange them for US dollars and spend the proceeds. The US, that has no use for SDRs, simply accumulates an ever-growing stockpile of costly pieces of paper.”²³⁷

Figure 2, Share of SDRs in World Reserves, 1970–2000²³⁸