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The Soros plan

By Steven Mufson

George Soros deals with big numbers and Thursday he delivered a speech in Copenhagen proposing that developed countries use $100 billion of their Special Drawing Rights (SDRs) at the International Monetary Fund to help the developing world deal with climate change. That, he said, would double the amount that the developed countries have proposed to give the world's poorer nations - without driving up richer countries' national deficits, he said. That might close the gap between the developed and developing countries and help bring about a final agreement.

Developed countries' governments are laboring under the misapprehension that funding has to come from their national budgets but that is not the case. They have it already. It is lying idle in their reserves accounts and in the vaults of the International Monetary Fund (IMF), available without adding to the national deficits of any one country. All they need to do is to tap into it.

If only it were that simple.

"It's a non-starter," says Simon Johnson, economics professor at the Massachusetts Institute of Technology and former chief economist at the IMF, who adds that he was in the "mildly disparaging" camp when it came to the Soros plan. "Soros is very good at getting headlines," he says. "But it would be almost impossible to get people to use SDRs for this purpose. And this would be a big change from how SDRs have been used in the past. It's not necessarily a good idea." Moreover, he said, it would probably require a change in the IMF articles and that would probably require congressional approval.

"I'm not in favor of it," says Kenneth Rogoff, a Harvard University economics professor and also a former chief economist at the IMF. "I don't know that the SDR is a terribly efficient transfer mechanism. The rich countries put the money in a big pot and it gets divided up according to countries' quotas. Those are determined historically and by political clout and aren't necessarily connected to income needs."

So what are SDRs and how would the Soros plan work?

The SDR is a type of reserve kept at the IMF and available to central banks. It was created in 1969 to help support the Bretton Woods fixed exchange rate system. Now it is used to help support the floating exchange rate system and provide reserves for central banks. Countries that borrow SDRs pay an interest rate and those with excess SDRs receive interest, albeit at low rates. This year, the IMF boosted its SDRs to deal with the financial crisis.

Here's how Soros explained SDRs and his plan Thursday:

In September 2009, the IMF distributed to its members $283 billion worth of SDRs, or Special Drawing Rights. SDRs are an arcane financial instrument but essentially they constitute additional foreign exchange. They can be used only by converting them into one of four currencies, at which point they begin to carry interest at the combined treasury bill rate of those currencies. At present the interest rate is less than one half of one percent. Of the $283 billion, more than $150 billion went to the 15
largest developed economies. These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves

I propose that the developed countries--in addition to establishing a fast start fund of $10 billion a year--should band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world. The fund would jump-start forestry, land-use and agricultural projects. These are the areas that offer the greatest scope for reducing carbon emissions, and could produce substantial returns from carbon markets.

Many groups welcomed the Soros proposal. ActionAid's Climate Justice Coordinator, Tom Sharman said: "The US$200 billion a year that developing countries need to tackle climate change effectively will not just fall out of the sky. That's why innovative ways to find the cash are so important."

But Rogoff isn't convinced. He says that he is in favor of figuring out some way to get the world's wealthy nations to help the poorer ones. And he thinks that the $10 billion a year proposal richer nations put on the table was "small potatoes." But he says, "It's depressing to think that aren't better ways to do it because SDRs are such an inefficient allocation mechanism. On the other hand maybe it should be the default proposal just to energize people to think of a better one."


Steven Mufson

 |  December 10, 2009; 3:23 PM ET Save & Share:  Send E-mail   Facebook   Twitter   Digg   StumbleUpon   Technorati  
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