How should the International Financial System be changed (legally and Essay

How should the International Financial System be changed (legally and politically) so that the burden of the dollar as the main reserve currency for the world d - Essay Example The financial markets went into a tailspin recently when it was rumored that Kingdom of Saudi Arabia was looking at alternative to dollar for pegging its currency. Iran has tried unsuccessfully to exhort OPEC countries look for alternatives to dollar, but has announced that it would diversify its foreign reserve portfolio to include Euro as well. It will not create much dent in US armor yet it has strong political message for USA. Malaysia has also tried to establish gold dinar for settling bilateral trade with Iran. Experts feel that it would not be as widespread as these two countries hope as gold would be too cumbersome to be traded and exchanged. Similarly some South American countries are also trying to establish alternatives to IMF and World Bank to cut the dependence on USA and its interfering policies as they see them. They are all small steps yet they show that countries are looking at alternatives to the US dollar. US dollar is not the most preferred currency with the common man too; there are reports that now a days people prefer to be paid in their local currencies by foreigners rather than dollars for the fear of devaluation of dollar something unimaginable a couple of years ago. This shows that the confidence on dollar cross the globe is ebbing slowly but surely. Jean-Claude Trichet President ECB has as far back as 2005 called for structural changes in the international financial system to take care of financial crisis which calls for greater financial transparency, more systematic approach to the future growth and greater global ownership. Apart from these three measures, inclusiveness of emerging economies and economies in transition in international financial architecture and greater cooperation of central banks of emerging economies and economies in transition would help in systematic development and correction of financial system. This shows that not only Europe and Japan have are going to have greater say in international financial system but emerging economies like BRIC and other South East Asian counties too will need to be included. A significant departure from the fact that USA called the shots after the downfall of USSR and end of cold war. USA is grappling with huge current account deficit, Japan as current account surplus where as Europe is balanced. Erosion of value of dollar and erosion of political supremacy of USA is linked together. It is time now for USA to share the burden of dollar with Europe. Edwin M Truman (2007) in his speech has said, "The United States and Europe have huge stakes and responsibilities in the stability of the international economy and financial system. How their authorities manage their economies and develop their financial systems is key. The challenge is to promote healthy, and to minimize unhealthy, competition between the euro and the dollar and their associated financial systems and economies." He calls for climb down of US and European claim to ownership on IMF and World Bank and include emerging and developing countries in the position of management rather than recipients. He even calls for changing the voting pattern to give greater weight age to other countries of the world to ref lect their growing economic stature. The "advanced" countries would need to give up their share by at least 10 basis points and might call for increase in the fund size by 50 percent. This would mean acknowledging the political and economic advancement of the so called developing nations by USA and its allies. There are reports