Possible Lines of Reform of the Bretton Woods System
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Possible Lines of Reform of the Bretton Woods System

Possible Lines of Reform of the Bretton woods System Since, the world monetary crisis has emerged out of the domination of one or two major economies and persistent deficits or surpluses in balance of payments, the main purpose of the reforms is to forestall a recurrence of major imbalances such as the huge U.S. deficit of recent years or the surpluses as in the case of West Germany or Japan.

Possible Lines of Reform of the Bretton woods System

 

Since, the world monetary crisis has emerged out of the domination of one or two major economies and persistent deficits or surpluses in balance of payments, the main purpose of the reforms is to forestall a recurrence of major imbalances such as the huge U.S. deficit of recent years or the surpluses as in the case of West Germany or Japan. The following possible lines of reforms may be indicated:

(i) Adequate machinery should be created for balance of payments adjustments on the basis of consultations through the I.M.F. and a set of indicators including the level of a country's reserves.

(ii) There should be stable but adjustable parities and penalties should be imposed on countries which fail to maintain balance or to carry out the required adjustment.

(iii) There should be commitment on the part of member countries to convert into any reserve instrument (S.D.R.'s or other currencies) any amount of their own currency held by other countries. This conversion should take place under a more flexible system of convertibility calculated to cope with specula­tive flows of funds.

(iv) Removal of foreign exchange controls which could shield a country against parity changes or other adjustments. There should be cooperation to cushion off the effects of possible speculation.

(v) A special I.M.F. body should keep a watch over member countries' balance of payments position, so that persistent deficits or Surpluses are outlawed.

(vi) Parities should in principle remain fixed but the rates should be allowed to fluctuate by 2.5 per cent or more on each side of the parity. Temporary floatation, however, should be permitted under I.M.F. supervision in special circumstances.

(vii) There should be a link between aid for development and the distribution of Special Drawing Rights (S.D.R.'s) in the I.M.F., the new reserve asset in the reformed system. Such a link would be a way of increasing aid. The developing countries are pressing for a greater share in wealth created by the Fund through the device of S.D.R.'s. There is need for an adequate built-in mechanism for the transfer of real resources to developing countries to accelerate their economic growth.

Conclusion

Thus, a system of fixed exchange rates with Smithsonian order of wider margins should replace the existing drift in favor of floating exchanges. Both the surplus and deficit countries should be compelled to keep their balance of payments in equilibrium (Hitherto, exclusive attention was given to deficit countries). The common measure of all currencies should finally shift from gold or dollar and be based on S.D.R.'s. There should be a firm link between aid and the allotment of S.D.R.'s.

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