Prospects for a multipolar international monetary system
Reform of the international monetary system is one of the most important challenges in global economic governance today. At the core of the issues is the question of whether the current international monetary system will remain intact, with periodic adjustments, or whether it will require a fundamental overhaul to accommodate the emerging new realities.
In this DIIS Report, Dr Mansoor Dailami and Professor Paul Masson envisage a more fundamental change in play, one that is likely to recognize the growing economic and financial clout of emerging market economies, particularly China.
The authors see three possible international currency scenarios for the period 2011–25 emerge:
- the U.S. dollar’s dominance remains without a serious challenger;
- a more multipolar international monetary system emerges, most likely with the dollar, euro, and renminbi at the center of the system;
- dissatisfaction with an international currency system based on national currencies leads to reforms that make supply of the world’s currency the result of multilateral decisions.
The three scenarios have different costs and benefits and are not equally likely to occur. The second, or multipolar scenario, is the most likely given current trends, but to work well, it would need to overcome tendencies for rivalry among key currencies and trading blocs—and also involve key reforms that make the three key currencies attractive in a variety of international roles.
The G-20 will need not only to replace the G-8, but also to improve on the G-8 when it comes to effective policy coordination. And central bank cooperation, markedly improved as a result of the financial crisis, evidently will have to be consolidated and extended.
In sum, the coming decades are likely to see a major trend to greater multi-polarity, which means both opportunities for a wider set of countries, and challenges for the smooth functioning of the international monetary, financial, and trading system. It seems likely that the increased economic importance of emerging market countries will in some way be reflected in their influence in international monetary relations. Enhanced policy coordination will be essential to make a smooth transition to a multipolar system while avoiding the occurrence of major crises—or at the very least, mitigating their effects.
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