International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz

In broad terms we can define the main challenge facing the global system of reserves in three ways, each based on the existence of a national currency (the US dollar) being used as a global reserve unit.2 The first is why adjustments are made by countries running international deficits rather than surpluses; countries with current account deficits must consume less and save less, while surplus countries must consume more and save more.3 Essentially this all comes down to the fact that this applies to all countries except the United States, which can finance its deficits with its national currency which at the same time is the international unit of account. The second problem is that international monetary policy, and therefore the value of the global unit of account, is dependent on the US macroeconomic policy. In other words, its currency responds to its economic cycles that are in turn reflected in the volumes of its balance of payments deficits and its counterpart, national deficits. And thirdly, “developing countries are forced to transfer wealth to countries which have the strongest currencies, mainly the dollar, by concentrating their reserves in said currencies”. (Ocampo, 2009: 1).

An international currency must fulfill a basic criterion: stability. And over time the dollar is growing more unstable, and is increasingly far removed from its status as the all-conquering currency of forty years ago, when it was established as the international unit of reference. The fixed exchange-rate system relied on two determining factors: the dollar's stability (a stable dollar meant a continuing equilibrium in the United States’ balance of payments) and a double asymmetry whereby surplus countries would not be forced to correct their imbalance, thus expanding their growth and, simultaneously, the US would not be obliged to make adjustments for imbalances: as the country of the reserve currency, it could finance its imbalances with its own currency.

The United States’ economic cycles are reflected in its twin deficits and the clearly increasing value of gold, affecting the volumes and value of dollar reserves kept by all countries as part of their monetary underpinnings. Figure 1 shows the trend of the United States’ deficits, both in its current account and its budget deficit, expressed in dollars.

Figure 2 shows the fluctuation in the price per ounce of gold in US dollars, from 1980 until 2010. This Figure was prepared using two scales, the scale on the right shows the percentage variation of the price of gold in dollars, reflecting the currency's volatility. And on the left, the scale shows –in dollar units and in absolute units– how the price of gold has increased by US$1,113 between 2000 and 2010. Yet from 1990 to 2000, its price fell by US$104.

Figure 1. United States’ federal deficit and current account 1980-2010
(US$ billion)
Source: Compiled by authors using data from IHS, Global Insight (2010).

2 According to Foreign Exchange and Derivatives Market Activity, a research paper produced by the Bank for International Settlements (2010), 84% of financial transactions are made in US dollars.

3 “If a country has a current account deficit it can be financed through the acquisition of fixed or financial assets from foreigners or through a reduction in reserves. A current account surplus, meanwhile, implies that the country finances other countries through an increase in its international reserves or the acquisition of foreign assets by nationals. The current account also equals the country's net lending to foreigners. Unlike a closed economy, an open economy can save by domestic and foreign investment. National saving therefore equals domestic investment plus the current account balance”. (Krugman & Obstfeld, 2006: 323).