Economic Assistance to Low-Income Countries: Should the Link be Resurrected?

Abstract

The Special Drawing Right (SDR) was established at the beginning of the 1970s for the purpose of acquiring greater control over the amount of international liquidity in the international monetary system. It was believed that there was an optimum quantity of international reserves. If this quantity were exceeded, there would be global inflation; if it were not reached, there would be recession and unemployment. The late 1960s had been perceived as a period during which international liquidity was inadequate. Moreover, the way in which international reserves were created under the Bretton Woods system relied heavily on the state of the U.S. balance of payments, and this was generally perceived to be unsatisfactory. SDRs seemed to offer a more centralized and controllable mechanism. It was intended that the SDR would eventually take over as the principal reserve asset in the international monetary system.

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