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Message from ADB's President Contributors Acknowledgements Executive Summary and Recommendations Jeffrey D. Sachs, Masahiro Kawai, Jong-Wha Lee, and Wing Thye Woo Paper Summaries (full papers downloadable) International Monetary Advisory Group Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai To What Extent Should Capital Flows be Regulated? Maria Socorro Gochoco-Bautista The Case for a Further Global Coordinated Fiscal Stimulus Willem Buiter Managing a Multiple Reserve Currency World Barry Eichengreen From the Chiang Mai Initiative to an Asian Monetary Fund Masahiro Kawai An Asian Currency Unit for Asian Monetary Integration Masahiro Kawai The International Monetary System at a Crossroad Felipe Larrain B. Towards a New Global Reserve System Joseph Stiglitz A Realistic Vision of Asian Economic Integration Wing Thye Woo An Asian Monetary Unit? Charles Wyplosz Will US fiscal Deficits Undermine the Role of the Dollar as Global Reserve Currency? If So, Should US Fiscal Policy be geared to Preserving the International Role of the Dollar? Yongding Yu International Monetary Working Group International Reserves and Swap Lines: the Recent Experience Joshua Aizenman, Donghyun Park and Yothin Jinjarak The Future of the Global Reserve System Daniel Gros, Cinzia Alcidi, Anton Brender, and Florence Pisani Renminbi Policy and the Global Currency System Yiping Huang Will the Renminbi Emerge as an International Reserve Currency? Jong-Wha Lee Asia's Sovereign Wealth Funds and Reform of the Global Reserve System Donghyun Park and Andrew Rozanov Reforming International Monetary System Kanhaiya Singh Designing a Regional Surveillance Mechanism for East Asia: Lessons from IMF Surveillance Shinji Takagi

Message from ADB's President

Today we are seeing the economic recovery gain traction in some parts of the world—most notably developing Asia. But recovery has been mixed in the more developed economies like the United States. And it is still uncertain in some of the fiscally stressed European Union states.

It is certainly welcome that a dynamic Asia is leading the world back to robust growth. However, that may well spur a resurgence of capital inflows, causing exchange rate instability and exacerbate previous trade and other imbalances. All that will add further pressure on a global reserve system already scored with fault lines.

That means, more than ever, we need to work together both globally and regionally to find solutions—however gradually implemented—that will bring about a workable reform of the global reserve system.

A well-functioning global reserve system ensures a commonly accepted source of liquidity that the world economy needs in order to flourish. It facilitates balance of payments adjustments and provides an international framework for constructing sound national economic policies. Its key elements include exchange rate determination, payments, adjustment required, and management of international liquidity requirements.

Our current global reserve system, unfortunately, is not functioning too well. Exchange rate systems, to cite one example, vary widely in flexibility. The use of the US dollar as an international reserve currency only heightens the problem of simultaneously using a currency as a domestic and as an international currency. It creates tension between national and global monetary policy making.

Going forward, the critical issue is simple to ask but difficult to answer: what are the alternatives, and who would want to take on that responsibility?

Many believe the euro is a serious rival to the US dollar as a reserve currency. However, the Greek debt crisis has made it clear that the euro is not yet a currency with a solid sovereign backbone. Given Asia's large and growing weight in the world economy, there is a growing opinion that the region should have its own reserve currency.

The yen is the Asian currency most used internationally, but its reserve currency status has weakened in the last 20 years. The yuan is a possible candidate—but a long-term candidate given the People’s Republic of China's relatively under-developed financial markets. There are also some proposals for a system based on special drawing rights or a regional currency basket. The key challenge here would be how to make this super-sovereign currency commercially viable.

In sum, the consensus seems to be that the US dollar will likely remain dominant for the foreseeable future. But it will be increasingly challenged.

Policy coordination, both at the global and regional levels, is the key to reforming the global financial architecture. Asia is no longer a minor player. It must take a more active global role. At the same time, Asian countries must continue to strengthen policy cooperation. Greater exchange rate cooperation will promote both intraregional exchange rate stability and extraregional exchange rate flexibility.

In conclusion, a reconsideration of the global reserve system is in everyone’s interest. The ongoing debate on the issue is both healthy and necessary. Asia has led the world out of recession. We did not go overboard financially—we learned our lessons from 1997–1998 well. But now, we must also accept our responsibilities as active members of a global economic community that is now different from just a decade ago.

I sincerely hope that this report will stimulate constructive debate—both within and beyond Asia—on how we can move to a more stable, efficient and equitable global reserve system that will better facilitate global trade and capital flows.

Haruhiko Kuroda
President
Asian Development Bank