Background
Special Drawing Rights (SDRs) were created by the International Monetary Fund (IMF) to supplement the existing reserves of member countries and to provide liquidity in the international monetary system. SDRs function as a type of international monetary resource in the IMF context, serving as both a unit of account and a payment instrument among IMF members. They do not constitute a currency but rather represent a potential claim on the freely usable currencies of IMF member countries.
Historical Context
The inception of SDRs dates back to 1969 amidst concerns over the limitations of gold and the US dollar in providing sufficient international liquidity. During the late 1960s, the global economy faced potential liquidity shortages that could impede economic growth and international trade. To address these issues, IMF member countries agreed to create SDRs under the First Amendment to the IMF’s Articles of Agreement.
Initially, SDRs were defined in terms of a fixed quantity of gold equivalent to one US dollar. However, the valuation method evolved, and since 1974, SDRs have been defined as a weighted average of a basket of major international currencies. This basket is typically reviewed every five years to ensure it reflects the currency’s relative importance in the world’s trading and financial systems.
Definitions and Concepts
Special Drawing Rights (SDRs): An international reserve asset created by the IMF to supplement its member countries’ official reserves. SDRs are allocated to each IMF member according to its IMF quota.
Major Analytical Frameworks
Classical Economics
Classical economics does not directly address the concept of SDRs since their framework predates the establishment of modern international monetary organizations, including the IMF.
Neoclassical Economics
From a neoclassical perspective, SDRs facilitate smooth functioning of the international monetary system by providing additional liquidity and promoting balance-of-payments stability.
Keynesian Economics
Keynesian economics supports the use of SDRs in addressing imbalances in the international economy and in fostering global economic stability by providing additional reserve assets.
Marxian Economics
Marxian economics would critique SDRs as a mechanism complying with the existing capitalist system that perpetuates international dependence and inequality.
Institutional Economics
Institutional economics appreciates SDRs as a collaborative effort by international institutions to sustain global economic stability, highlighting the role of global governance.
Behavioral Economics
Behavioral economists would examine the impacts of SDR allocations on national behaviors, including how SDRs influence member countries’ fiscal and monetary policies.
Post-Keynesian Economics
Post-Keynesian economists value SDRs for their role in mitigating global liquidity traps, hence contributing to the overall stabilization of the international financial system.
Austrian Economics
Austrian economics is likely to view SDRs critically, seeing them as an artificial monetary tool that could distort market signals, contributing to economic inefficiencies.
Development Economics
Development economics sees SDRs as a beneficial tool in promoting financial stability in developing countries by providing much-needed liquidity during economic crises.
Monetarism
Monetarists may view SDRs cautiously, concerned about their potential inflationary impacts but acknowledging their utility in solving liquidity shortages.
Comparative Analysis
SDRs are unique in the landscape of international monetary assets. Unlike national currencies, which are instituted by individual countries, SDRs are international in nature and maintain value based on a currency basket. This currency basket allows SDRs to retain stability and credibility as a reserve asset. Compared to other forms of aid or lending, SDRs do not come with stringent conditionalities, making them a less politically contentious tool for strengthening global financial stability.
Case Studies
- 1971 Bretton Woods Crisis
- 2008 Global Financial Crisis
- COVID-19 pandemic response
Suggested Books for Further Studies
- “Globalizing Capital: A History of the International Monetary System” by Barry Eichengreen
- “The IMF and the Future: Issues and Options Facing the International Monetary Fund” by Warren L. Coats
- “Money and Empire: International Gold Standard, 1870-1914” by Catherine R. Schenk
Related Terms with Definitions
- International Monetary Fund (IMF): An organization of 190 countries that works to foster global monetary cooperation and financial stability.
- Balance of Payments (BoP): A comprehensive record of a country’s economic transactions with the rest of the world over a period.
- Convertible Currency: A currency that can be freely traded for other currencies without governmental restrictions on the foreign exchange market.
