Rethinking Bretton Woods | Thu, Jan 12, 2006
In a letter to the editor published by the Financial Times, Aldo Caliari argues that self-insurance by developing countries, rather than an ideal situation, is a product of the incompetence of the International Monetary Fund in providing a more efficient mechanism for this purpose.
To The Financial Times
Published: January 11, 2006
Sir, Mohamed el-Erian ("Why Brazil and friends want the world to listen", January 5) implies that the growing ability of emerging markets to "self-insure" through large reserve holdings is a sign of the "more confident fashion" in which these countries engage in the world economy.
However, it should not be forgotten that reserves are a very inefficient alternative to collective insurance mechanisms, representing a very expensive way for developing countries to cushion their vulnerability to disruptive financial and trade shocks. Their opportunity costs in terms of development are huge, which is all the more evident when they are accumulated in large amounts by the same countries that show insufficient rates of social and public investment.
Providing a scheme for minimising the costs of insurance and ensuring countries at different stages of development had fair access to it was one of the functions the International Monetary Fund was set up to play. In the light of the negative effects IMF policy prescriptions often had on growth and poverty rates, not one tear should be shed about the declining influence of this institution in developing countries.
But the fact that more and more countries use higher capital inflows to self-insure through reserve accumulation can hardly be interpreted as a positive sign but as an effect of the failure of the international community to craft a collective action approach that could ensure those gains are applied to more development-friendly uses. In a world where financing needs to meet the Millennium Development Goals remain by far unfulfilled, this failure has attached, undoubtedly, a sad and tragic dimension.
Rethinking Bretton Woods Project
Center of Concern
Washington, DC 20017, US