IMF Special Drawing Rights and Economic Aid to Less Developed Countries

Abstract

IMF Special Drawing Rights and Economic Aid to Less Developed Countries

The issue of a ‘link’ between the Special Drawing Rights scheme in the IMF and development assistance to developing countries has been the subject of considerable controversy since the scheme’s inception in 1970. The opponents of the ‘link’ have stressed the necessity of preserving the character of the SDR facility as a reserve-creative system without any in-built mechanism for the transfer of real resources among specific groups of participants; in their view, introduction of the “link” would run the risk of impinging upon other important sources of assistance to developing nations, make the provisions of the SDR scheme more difficult to implement, and add to world inflationary pressures. While admitting the need to avoid these dangers, other experts have expressed doubts that the SDR liquidity mechanism can, or indeed should, be expected to remain ‘neutral’ with respect to international resource transfers, given that large differences in incomes, economic structures, and rates of savings and capital formation continue to prevail between the economically advanced and less advanced participants. The present study addresses itself to the main issues arising out of this debate in the light of actual experience with the SDR facility and against the broad background of the post-war economic aideffort. Using published data on SDR usage by various groups of participants, the first section attempts an appraisal of the resource flows between the developed and less developed participants that are likely to result from the operation of the SDR scheme in its present form; the results are then compared with other major sources of official development aid. The second section considers the main criticisms that have been levelled against traditional forms of aid. In the third section, the discussion focuses on the techniques, and problems, of allotting larger amounts of SDR units to the less developed participants directly. Finally, the merits of an ‘organic link’, i.e. method of SDR financing of development projects through existing capital market channels, are discussed with reference to the external debt burden of the developing nations. The findings of the study provide support for the view that the SDR scheme, as it is presently constituted, cannot realistically be expected to remain ‘neutral’ with respect to real resource transfers between high and low-income participants; if the pattern of SDR usage established in the early stages of the scheme’s existence were to prevail, the net potential resource gains to the less developed countries as a group might lie between 7 and 10 per cent of any particular SDR allocation. Second, for the ‘direct link’ to add significantly to such resource flows, it would appear necessary to alter drastically the present basis for SDR allocations. Finally, the chief merit of the ‘organic’ form of the link is that it would provide a technically feasible method for increasing the concessionary element in future development lending.