Chinese Currency in Sdr

In his recent blog post, “Christine Lagarde and the SDR Basket,” Edwin Truman warns that the International Monetary Fund (IMF) staff’s recommendation, publicly reinforced by IMF Managing Director Lagarde, that the Chinese renminbi be included in its basket of reserve currencies—Special Drawing Rights (SDR)—has politicized the SDR basket and tarnished its legitimacy. He claims the impending inclusion is simply a political nod to China that compromises the status of the SDR; he could not be more wrong. While political motivations were almost certainly a consideration, this move in no way increases the politicization of the SDR. Rather, this move will improve the political status of the IMF and the SDR and bring material economic benefits to the world economy.

From its creation, the SDR has been nothing if not political. The SDR, the currency that denominates IMF loans, was created at a time when the U.S. dollar was the world’s reserve currency. The U.S. had been running massive current account deficits and found itself with a continuously decreasing ratio of gold to the number of U.S. dollars with a claim on that gold. While the U.S. was being accused of “economic imperialism” and the dollar peg to gold came into question, the IMF created the SDR a stopgap measure to help alleviate concern and speculation against the U.S. dollar. This accounting maneuver was done to maintain the world economy’s status quo with the U.S. as the political and economic hegemon, fueling global development. The author says that the SDR has yet to live up to the status created for it in the IMF Articles of Agreement of “making the Special Drawing Right the principal reserve asset in the international monetary system,” and he claims that this political move is “another nail in the SDR’s coffin.” He is wrong on both fronts. As mentioned above, the SDR has always inherently been a political fiat; while it may change the political dynamics, inclusion of the renminbi will not change...