International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz
THE NEED TO MAINTAIN MONETARY RESERVES

The 2008 financial crisis caused a negative impact on global trade, creating major imbalances in international financial and trade accounts. Therefore, developing nations are now trying to minimize the costs and effects of their balances of payments in various ways; this has led to a series of protectionist measures such as the increase in their respective international reserves, foreign exchange interventions, etc., which hardly help to close –and in fact widen– the gap between developed and developing countries.

Furthermore, the weaknesses in the international monetary system are closely interconnected with the US dollar's role as the global unit of account, as well as the capacity of the system itself to address the liquidity problem, and this has a direct repercussion on the increasing levels of foreign reserve assets held by emerging countries.

The asymmetry between countries with deficits and those with surpluses in their balances of payments, as well as that between the country that issues the international reserve currency and the rest of the world, creates adjustment problems that arise essentially due to their reluctance to implement monetary policies to maintain a real price for their respective currencies and not keeping them overvalued in order to prevent inflation pass-through. “The high social costs implicated in a currency's devaluation in developing countries explains why some countries look on their currency's appreciation with benign indifference and even increase the likelihood of Dutch disease in their economies when the international financial market conditions are right” (Mántey, 2010: 176).

The US economist Robert Triffin foresaw the result of the excess in the United States’ foreign liabilities, by establishing that central banks of other countries would start to exchange their dollars for gold. In 1960, Triffin produced a report on the international financial system which contains the following concept known as the Triffin dilemma:

“If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could draw the world economy into a contractionary spiral leading to instability. If the US deficits continued, a steady stream of dollars would continue to fuel world economic growth. However, excessive US deficits (a dollar glut) would erode confidence in the value of the US dollar. Without confidence in the dollar, it would no longer be accepted as the world's reserve currency. The fixed exchange rate system could break down, leading to instability.”1 (Triffin, 2006, 1960: 45).

With this outlook, Triffin proposed the creation of new reserve units which would not depend on gold or national currencies, but solely add liquidity to the whole world. The creation of this new unit would allow the United States to cut its balance of payments deficit while also allowing for global economic growth. These ideas are still relevant today given the endless consequences of the crisis that officially began in October 2008 and which still have no likely conclusion in sight, and also since emerging countries are increasingly assigned the main responsibility of remedying this crisis –particularly by increasing of international reserves, raising excess global liquidity, the strengthening of their currencies (which allows lowering international prices) and intensifies unfair global competition between them and harms their internal economies.

1 In August 1971, President Richard Nixon announced the end to the convertibility between US dollars and gold, placed a 10% tariff on imported goods, and reduced foreign aid by 10%. By breaking with the existing link between dollar and gold, the system was abandoned and all other currencies linked to the value of gold were floating. In 1973, the decision was taken for a widespread floating of currencies, and increases in movements of capital no longer permit a return to fixed exchange rates. (González, 2002: 53).