Why Don't We Hear a lot More About SDRs?

Posted by Dani Rodrik on 4 February 2009

This one seems a no-brainer to me. The easiest and quickest way to create global liquidity and enable credit-starved emerging and developing countries to increase their spending is for the IMF to engineer a vast new SDR allocation. It can be done at the stroke of a pen, and it does not require the IMF to negotiate a program for every country that needs a loan.

Let's remember some basic facts. The U.S. fiscal stimulus will be a lot less effective if it is not accompanied by similar fiscal action elsewhere. Developing nations are severely limited in what they can do in this respect because they have little room for domestic borrowing. Serious fiscal stimulus requires that they have resort to external resources, of which there is a severe shortage at the moment (both because of the flight to quality and the borrowing that is going on in the developed world). The existing swap lines and the IMF's new short-term lending facility have had few takers, in part because no country wants to signal that they are (or may be) in trouble and running out of resources. A generalized SDR allocation--in return for a commitment to spend a share of these resources in pursuit of a globally coordinated fiscal stimulus--would give countries the cover needed to do what is good for them and for the rest of the world without suffering a reputational penalty.

The main objection to the creation of SDRs has always been that this would be inflationary. In the current environment, this is a plus rather than a minus. Inflationary, you say? Pile it on! That is exactly what the doctor ordered.

So if you want to reduce protectionist pressures in the U.S. and elsewhere while helping the developing countries get over a crisis that is not their doing, SDRs can be a large part of the solution. So I repeat my question: why don't we hear more about this?