Why the UN needs to create a global dollar

In his speech on September 26, 2020, on the occasion of the 75th Anniversary of the United Nations, Prime Minister Modi said: “I am confident that on the occasion of its 75th anniversary, the United Nations and its member countries will endeavour with a strong commitment to maintaining the relevance of this great institution. Stability in the United Nations and empowerment of the United Nations are essential for the welfare of the world.”

The United Nations is expected to provide global public goods ranging from security, welfare and development to prevention of terrorism and management of climate change. For that purpose, it needs a stable source of funding.

At present, its funding system is weak, preventing it from delivering effectively on its duty. If the Government of India really wants empowerment of the United Nations, it has to come forward with some proposals to strengthen its financial capability.

Here we present some thoughts on how a stable and secure system of funding the United Nations can be designed over the next five years.

The funding structure

The UN is funded in two ways — through mandatory payments and voluntary contributions. In 2015, the total revenue for the UN system as a whole was $48 billion based on contributions by its 193 members. Out of the total $48 billion, more than half was earmarked contributions (53 per cent), meaning the funding was tied to a theme or a country.

Assessed contributions, those that can broadly be defined as the price of membership, made up 30 per cent, while core funding — voluntary united contributions — made up 10 per cent. Getting contributions from member states is a constant struggle for the UN system with a recent increase in its reliance on private sector contributions with all the risks of “conflict of interest”.

In October 2019, while presenting the annual budget, the UN Secretary-General warned against the increasing cash shortage plaguing the organisation, explaining that for the current biennium, budget implementation is no longer being driven by programme planning but by the availability of cash at hand.

In 2019, managers have been instructed to adjust their hiring and non-post expenditures owing to liquidity constraints. This undermines mandate delivery, he warned, noting that the organisation is entering November without enough cash to cover payrolls.

This is clearly an untenable situation. Some innovative solution is needed for meeting the funding needs of the UN system.

Dollar dependent

One important source of funding public goods is the seigniorage generated by the economy for its need for liquidity. At present, this is appropriated largely by the US since its currency, the dollar, is the main reserve currency of the world, though China is now trying to share in this financial hegemony by internationalising its currency. This is sometimes seen as an “exorbitant privilege”.

However, it is also an exorbitant cost similar to the ‘resource curse” of mineral-rich countries. Under the Bretton Woods Agreement, the US currency was the reserve currency on the basis of the US pledge to redeem dollars into gold at $20.67 per ounce. This acted as a restraint on the US on running current account deficits. But in 1971, the US reneged unilaterally on this pledge and current account deficits began to increase.

Current account balance of the US which had a surplus of $2.6 billion in 1970 began to run into deficits. During 1971-2019, the US ran a current deficit of $12 trillion which ran as high as $810 billion in 2006. In addition, it was free to borrow abroad in its own currency. During these years, the US has thus been suffering from the so-called “Dutch Disease” with all its suspected effects in full play.

By creating an external soft budget constraint, it allowed the US to run huge trade deficits which effectively exported its employment abroad. The recent attempts to correct its trade imbalance through tariff reforms has been largely frustrated due to this soft budget constraint.

There is clearly a need to change the system so that seigniorage can accrue to global institutions in a measured way to fund global public goods.

A global dollar

Over time, there have been many calls for a global currency in some form or other. John Maynard Keynes during the Bretton Woods Conference proposed the creation of global currency (which he dubbed bancor). During the seventies when the dollar system was under strain, the IMF created an SDR system which could provide an alternative means of liquidity creation.

More recently a UN Committee headed by Joseph Stiglitz has called for an SDR-based global currency system. But the transformation from the dollar-based reserve system to a global currency is a huge task saddled with difficult political and technical problems and will take a long time. Perhaps, a small beginning can be made by creating a small amount of global currency as a supplement to the dollar system to fund the UN operations.

However, any threat to the dollar’s reserve currency status is unwelcome to the current global superpower. Perhaps, we can envisage a parallel currency (let us call it Global Dollar, GLO$) as a supplement to the US dollar system. Under this, all UN countries will agree to accept GLO$ for settlement of their international transactions and keep it in reserves when appropriate.

Unlike the present SRDs, GLO$ will be a currency acceptable in all day-to-day transactions. The GLO$ could be made equal in value to US$ and fully convertible into any world currency including US dollar$. If an annual amount of say GLO$ 150 billion is created every year with the approval of UNGA and Security Council and managed by a special unit in the UN, it will mean an increase in the current reserves of about $20 trillion by only 0.75 per cent per year with little risk of inflationary pressures in the world economy in today’s atmosphere.

This global currency available for reserves and transaction purposes will reduce the pressure on the US system to create US$ for global needs. And this amount would be sufficient to fund all the UN operations including a substantial amount of $100 billion per year for mitigation and adaptation on climate change.

Developed countries would be saved from the difficult task of convincing their public to support the UN system and to provide for the global public goods in their domestic budgets.

In sum, the proposal above has four arguments in its favour. First, global financial justice demands that global windfall is used to provide global public goods and not the short-term temptations of one country.

Second, the proposal will initiate in a small way the difficult transition from the reserve currency status of the US dollar, a transition which will be good for the US over the long-term.

Third, it will obviate the need for the increasingly difficult task of convincing the public in developed countries to use their taxes to support the developing countries and provide a global public good. Fourth, it will put the finance of the UN system on a firm footing to allow it to provide global public goods.

The writer is Formerly Distinguished Fellow, Niti Aayog

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