Low-Income Countries Vulnerabilities and the Need for an SDR-Based International Monetary System

The global financial crisis, the weakening role of the dollar and the increasing importance of China in the global arena are calling for a reform of the international monetary system (IMS) in the direction of a greater multilateralism. We agree with the necessity to reform the IMS and we advance a proposal based on a greater role of the Special Drawing Rights (SDRs), focusing on the potential benefits that a new monetary order could brings to Low-Income Countries (LICs). Given their extreme vulnerability to external shocks and their dependence on the exchange rate vis-vis the US dollar, poor countries would benefit from the creation of a more stable multi-currency monetary system. The new SDRs will created exogenously - with a disproportionate allocation to LICs -, but also endogenously, through the substitution account and the overdraft facility. Finally, we discuss the superiority of this proposal in the context of the current foreign assistance framework.