1. GLOBAL TURMOIL: THE INTERNATIONAL MONETARY SYSTEM TODAY Benjamin J. Cohen University of California, Santa Barbara Remarks prepared for presentation at a Conference on the BRICS and Asia, Currency Internationalization, and International Monetary Reform, Hong Kong, December 10- 11, 2012

2. LIVING WITH TURMOIL  The int’l monetary system faces multiple threats Europe’s sovereign debt crisis Weakening US dollar Dimming growth prospects “Currency wars” Volatile capital flows  Is worse to come? In my opinion, No. Governments will muddle through. Modest reforms are possible – but not more.  Outlook: We have to learn to live with a certain amount of monetary turmoil.

3. OUTLINE OF MY REMARKS  1. The central challenge: governance  2. The four key elements of global monetary governance Adjustment Liquidity Confidence Leadership  3. Implications for the BRICS and Asia

4. THE CENTRAL CHALLENGE: GOVERNANCE  Governance: arrangements for the formulation, implementation, and enforcement of the “rules of the game”  In short, who’s in charge?

5. GLOBAL MONETARY GOVERNANCE  “Governance without government” No central authority: governance must rely on cooperation among sovereign governments Two problems  Compromises are inevitable; the rules will always be sub-optimal  Violations are likely: behavior will be imperfect, too

6. GLOBAL MONETARY GOVERNANCE  Four critical elements: Adjustment: management of exchange rates Liquidity: management of the supply of balance-of-payments financing Confidence: maintenance of trust in principal instruments of liquidity Leadership: exercise of power for the common good

7. BRETTON WOODS SYSTEM  Design was state-centric: key decisions to be made by governments or their agents (IMF). Rules were clear and transparent Adjustment: par-value system Liquidity: International Monetary Fund Confidence: US dollar was “as good as gold” Leadership: the United States

8. THE SYSTEM TODAY  Two major changes Revival of global financial markets  Exchange rates now determined by markets  Financing is also market-determined  Greater risk of destabilizing shifts of confidence among major currencies  Result: a sharper risk of systemic crises Diffusion of power among states  Deadlocked leadership  Can matters be improved?

9. ADJUSTMENT  Amendment of IMF charter (1978) Exchange rates free to float Subject to IMF surveillance  But surveillance has been ineffective States have been free to do what they want Result: risk of “currency wars”  Reason: Demands of national sovereignty Unlikely to change

10. LIQUIDITY  With revival of financial markets, liquidity supply has become hostage to investor sentiment Behavior is often pro-cyclical Thus tendency toward repeated crises  Failed responses by governments Repeated promises to strengthen rules In practice, little accomplished Example: Europe’s sovereign debt crisis  Reason: again, demands of national sovereignty Again, unlikely to change

11. CONFIDENCE  Toward a “leaderless” currency system Dollar’s dominance is weakening But there is no obvious alternative Heightened risk of sudden shifts of confidence – destabilizing capital movements  Good or bad? Good? Greater discipline on the US – no more “exorbitant privilege” Bad? Others will also seek to enjoy an exorbitant privilege

12. LEADERSHIP  Effective leadership rests on two critical factors: Consensus on basic principles Concentration of power  Most conspicuous today by their absence. Consensus has broken down Power is more diffused (especially autonomy)

13. IMPLICATIONS FOR BRICS AND ASIA  Revival of global financial markets Advantage: ready access to finance Disadvantage: vulnerability Policy option: capital controls?  Diffusion of power among states Gain to date: autonomy Potential gain: influence Policy option: build a “winning coalition”? Problem: still no consensus on what is needed

14. AGENDA FOR BRICS AND ASIA  Adjustment: prepared to accept IMF surveillance?  Liquidity: prepared to submit domestic finances to int’l rules?  Confidence: prepared to forego an “exorbitant privilege”?  Leadership: prepared to share the responsibilities of governance?