There is, however, an alternative. Keynes, during the founding of the IMF, envisaged the issuance of “global greenbacks,” more familiarly known as special drawing rights (SDR). The international community has already recognized that it can provide liquidity to a country in the form of SDRs, which effectively give a country purchasing power. They are, in a sense, a form of international money, exchangeable for hard currencies that can be used to purchase goods and services.

Global greenbacks could be used to finance global public goods, such as improving the environment, preventing the spread of diseases like AIDS, increasing literacy in the developing world, and providing humanitarian and broader development assistance. For countries that receive less than the amount they put into reserves, the new “global money” would supplement reserves, freeing up money that otherwise would have been set aside. Countries that receive more than they put aside for reserves could exchange the new money for conventional currencies. Eventually, of course, all the new money wends its way into reserves. In effect, these reserves are a commitment of the countries of the world to help each other in times of difficulty. A country with the reserves of this new global money could exchange it for hard currencies, with which it could, for instance, sustain needed food imports. This policy would end the logic of instability that is built into the current system, for it would allow some deficits without inevitable crisis. Even if a developing country runs a trade deficit, its financial position can be stabilized by assistance from the international community through a grant of the new global money.

This scheme would not be inflationary; rather, it would offset the inherent downward bias of the current regime. Relative to global income—some US$40 trillion—the magnitudes of monetary emissions would be miniscule. But relative to present spending on global public goods or official development assistance, the amounts are enormous. The scheme would allow for the support of vital global public goods in a way that is not subject to political vicissitudes in major developed countries. Furthermore, this global system can be implemented even without the unanimous support of developed countries, some of whom might resist a greenback scheme that would undermine the advantages they receive from current arrangements. Instead, this policy requires only that most advanced industrial countries agree to recognize the new SDR as a form of global money. These countries could pressure any hold-outs by agreeing to limit their holdings of non-participant currencies and treasury bills in their reserves. There are, of course, innumerable details that would have to be worked out before such a system could be put into practice, but I am confident that this could be done.

A Bankruptcy Regime

With the collapse of Argentina following on what are widely viewed as failures of big bail-outs in Brazil, Russia, Korea, Thailand, and Indonesia, there is a growing recognition, even in the IMF, that there is a need for an alternative policy response to these crises. The most widely discussed alternative involves a form of bankruptcy or standstill procedure. During the East Asia crisis, it was only with the standstill that Korea’s exchange rate stabilized. Indeed, it is often desirable to impose capital controls to stop economic hemorrhaging during a crisis, just as it may be desirable to impose capital controls to stop an excess inflow of capital into a country during a boom. The rush of capital into and out of a country imposes high costs on others, called externalities. Like other forms of externalities (such as pollution), government intervention is likely to be a desirable solution. Chile and Malaysia have shown that such interventions in inflows and outflows are not only feasible, but can also be conducted without significant adverse ancillary side effects—leading to significant benefits in both cases. Given the proclivity of markets to excessive overreaction, well-implemented standstills can be important instruments for stabilizing markets in the case of a country facing a crisis.

In any proposed bankruptcy procedure, it is first important to distinguish between private and public indebtedness. Private debts should not be converted into public debts—a mistake that was made in many instances as a result of pressure from Western banks and governments. There is a need for expedited financial restructuring of private debts in the event of a macroeconomic disturbance—a global version of US Chapter 11 regulations which provide for relatively quick corporate reorganization, allowing the firm to continue producing. But bankruptcy, even under Chapter 11, can be a slow process. When only a few firms in a country face bankruptcy, delay is costly to the shareholders and workers, but not to the economy as a whole. But when 50 percent of the firms in a country face bankruptcy, as in Korea, or 75 percent, as in Indonesia, then delay is very costly and causes macroeconomic consequences that go well beyond the workers and shareholders of the particular firms striving to resolve the companies’ difficulties.

In designing bankruptcy laws, it is necessary to balance creditor and debtor interests, which is why bankruptcy legislation is so political. The IMF has tried to push a particular approach to bankruptcy, but given its close connection to creditor institutions, its advice has to be viewed with suspicion. In any case, its usual approach of one-size-fits-all advice works particularly poorly in this arena. A bankruptcy law that might work well in the United States could be a disaster in Russia or Thailand. The excuse that the problem is not with the law but with how it is implemented misses the central point. Courts are needed to implement bankruptcy laws, and their interpretation of the law will be based on the mores and perspectives of that particular country.

Sovereign Debt

The second major set of issues concerns sovereign debt (debt of a government), and here there is need for an international bankruptcy regime based more on Chapter 9 of the US bankruptcy code, which pertains to the inability of municipalities to fulfill their debt obligations. The critical distinction is that Chapter 9 recognizes the importance of the basic functions of government. In the aftermath of a public “default,” creditors—domestic and foreign—should be at the table along with all the other stakeholders, such as social security claimants and those who depend on the state for education and health services. Indeed, Chapter 9 recognizes the central importance of maintaining governmental functions.